Tilt! Game Over...

Authored by Jeff Thomas via InternationalMan.com,

Anyone who’s ever played a pinball machine can attest to the fact that the player easily becomes wrapped up in it, to the point of the exclusion of all else happening around him. He hits the flippers rapidly, glancing up from time to time at his increasing score. It becomes irresistible to jiggle the table frequently, in an effort to get the ball to go where the player wants it to go.

And, of course, every player is familiar with the disappointment that comes when he’s overplayed his body English and the machine stops suddenly, lighting up a sign that says, “Tilt! Game Over.”

Much of the world is now embroiled in an economic game similar to pinball. The stakes are becoming ever greater, the flipper buttons are being pressed ever faster, and those who are desperately attempting to keep the collapsing system going are shoving the table ever more recklessly.

At this point in the world economy, the number of possible triggers that could take the system down is growing ever more rapidly.

And, for those who are paying attention, the list of dominoes that we’ll see fall is becoming ever more starkly apparent. Let’s have a look at just some of the more basic dominoes:

• Creditor countries dumping US Treasuries back into the US market. (This has already begun and will continue until the dollar crashes.)


• Cessation of the US dollar as the petrodollar. (This is about to begin, but will take several years to play out fully.)


• Economic sanctions by the US against Russia and China (that are unlikely to have the support of the US’s allies).


• Implementation of tariffs, resulting in a tariff war.


• A rise in interest rates (as was consciously created in 1929 by the Fed in order to trigger a timed crash).


• Bursting of the bond market bubble.


• A major stock market crash.


• Dramatic increase in mortgage defaults.


• A spike in commodity prices, coinciding with a drop in asset values (inflation and deflation at the same time—the worst possible combination).


• Collapse of the paper gold market.


• A switch to the new IMF cryptocurrency and a major effort to end the use of cash. (This will succeed to some extent, but will create a worldwide monetary black market.)


• US defaults on its debt. (This, too, will occur over several years.)


• Collapse of the dollar.

Many of these events will be black swans.

As can be expected, some of the events will be sudden, whilst others will take time to play out. In addition, although they’re likely to occur roughly in order, several will be in play at any given time.

Although each of these events can be anticipated, they won’t come with warning notices. Their actual occurrences will be unheralded. (As an example, when a stock market crash occurs, investors will wake up to discover that it’s occurred whilst they were sleeping.)

And, just as in pinball, the end of the game will come quite suddenly. The moment that the player will know that it’s “Game Over” will be when he goes to his ATM and finds that the screen is dark. The machine has been made inoperative overnight. Annoyed, he’ll go to the next-nearest ATM, but will find that that one, too, is shut down. He’ll go to others and, at some point, will realise that they’re all shut down.

Without spending cash in his wallet, he’ll then go to the local gas station or supermarket and attempt to pay with his credit cards but will find that they’ve all been made inactive. In trying to sort out the problem with the manager, he’ll be told that all credit cards for all his customers have been denied that day.

The realization will suddenly hit that money has ceased to flow. For how long? The television news programmes will state that it will be temporary, but they don’t define “temporary.”

Those few individuals who understood that an economic crisis was brewing will take inventory of how much cash they have remaining in their wallets and how much they’ve stashed at home, and realise that this total now represents their total purchasing power.

Overnight, wealth is no longer measured in saleable assets, since, if virtually no one has spending money, they have no means of payment. Therefore, the fellow who thought that, if he found himself in a pinch, he could always sell the Harley in the driveway, or perhaps the family boat, for some quick cash, can no longer locate a buyer who can pay him—at any price.

Of course, many people will do all they can to contact their bankers, demanding that they be allowed to remove their money on deposit and extract the contents of their safe deposit boxes, but they’ll receive a recording, saying, “We’re sorry for the inconvenience, but the bank will be temporarily closed until further notice.”

At this point, “wealth” will change its definition to include only the cash in hand, plus whatever might be bartered.

Recently, I received an email from an associate in Canada, who asked, “When will I know when I really have to make a move?” My answer was, “You won’t. But there will be an actual day when you’ll know that you’ve waited too long and it’s now too late. That day will be the day that you visit the ATM and find it closed.”

That’s it. “Game Over.”

So, are we all doomed? Well, no, not at all. Those who are proactive can remove themselves from the system now, before the system reaches the “Tilt!”

If the reader lives in one of the jurisdictions that’s likely to be the most impacted (EU, US, Canada, etc.), he would be wise to liquidate his possessions there and move the proceeds to a jurisdiction that’s less likely to be impacted and which has a long reputation for economic stability. He should place his wealth (no matter how great or little) in precious metals and real estate overseas—again, in a safer jurisdiction.

He should retain some money (in cash and precious metals) at home, or nearby—enough to cover a few months’ expenses.

If he can afford to, he should then create a bolt-hole in a jurisdiction that he can go to quickly, should the crisis overtake him.

However, even those who recognize that their home country may soon become an economic prison camp are likely to dither, failing to prepare adequately. Sadly, they’re likely to find themselves in the position of the fellow in the photo above, discovering that “Game Over” has arrived before he could ready himself.

*  *  *

This isn’t all bad news. A select group of investors will not only endure the collapse—they’ll actually come out the other side much wealthier. There are practical steps you can start taking today to make yourself one of them. Find out how in our Guide to Surviving and Thriving During an Economic Collapse. Click here to download your free PDF copy now.

Visualizing How Billionaire Investors Hedge Against Geopolitical Black Swans

Investors must always be comfortable with the idea that the market bears risk.

Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be. However, as Visual Capitalists"s Jeff Desjardins notes, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.

HOW BILLIONAIRES ARE HEDGING

In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.

Courtesy of: Visual Capitalist

The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.

The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades.

– Reva Goujon, VP Global Analysis of Stratfor

According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.

As a result, the following potential geopolitical risks are at the top of the agenda for experts and top investors:

Domestic risks:
Unpredictability of the Trump administration, government inaction, a trade war with China, and NAFTA renegotiations

 

International risks:
Economic nationalism, further “exits” from the EU, Russia and China seeking to assert authority, terrorism, escalation of Middle East conflicts, and North Korea’s nuclear ambitions

ELITE INVESTORS TAKING ACTION

With these risks perceived to be on the table, some of the world’s most elite investors like Ray Dalio and Warren Buffett are taking action. Here’s what they are up to:

Ray Dalio

Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, had this to say:

When it comes to assessing political matters we are very humble.

-Ray Dalio, Aug 2017

Dalio’s advice: to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. He also recommends a 5%-10% position in gold.

Warren Buffett

The Oracle of Omaha has a similar but very different perspective.

No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.

– Warren Buffett, Feb 2017

With this in mind and with equities expensive, the seasoned value investor holds onto piles of cash to prepare for potential buying opportunities. Berkshire Hathaway now has $99.7 billion in undeployed cash, the most in the company’s history.

Bill Ackman

Billionaire hedge fund manager Bill Ackman took a position in “out of the money” call options on the VIX.

This will protect against stock market risk.

– Bill Ackman, Aug 2017

David Einhorn

The billionaire founder of Greenlight Capital says he is keeping gold as a top position.

The (Trump) administration comes with a high degree of uncertainty.

– David Einhorn, Feb 2017

Howard Marks

Lastly, the famous value investor Howard Marks warned his clients to move into lower-risk investments to protect against future losses.

The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.

– Howard Marks, July 2017

 

"Black Swan" Anxiety Has Never Been Higher

The Fed"s Williams warns that they "don"t want there to be excesses in financial markets... "

Two quick things...

The market has almost never been this expensive...

As Peter Boockvar warns: "Almost there. S&P 500 price to sales ratio is just 4% from March 2000 peak."

And investors have never been more concerned about "black swans"...

As Bloomberg notes, concern is building that years of record-setting gains for U.S. stocks may give way to a market plunge, according to Jim Paulsen, Leuthold Group Inc.’s chief investment strategist. In a report Monday, he cited the Chicago Board Options Exchange’s SKEW Index, which shows the perceived risk for a so-called black-swan event that’s reflected in S&P 500 Index option prices.

Trade accordingly...

"Different Type Of Bubble": Markets, The Sports Illustrated Jinx, And The Dodgers

Submitted by Gary Evans of Macromon

Markets, The Sports Illustrated Jinx, And The Dodgers

Why do stocks and assets markets crash? Why is there is a Sports Illustrated jinx and magazine cover stories often signal a sign of a top or bottom of the subject being portrayed?

Regression to the mean, or, more simply, just moving back to the long-run averages.   

Dodgers Tank After SI Cover Story

After going on a tear of 51-9,  the best 60 game winning stretch in 105 years,  the ink was barely dry on the August 28th Sports Illustrated’s cover, which read, “Best Team Ever,” before the Dodgers went into a major tailspin.

“Best. Team. Ever?” The ink was barely dry the cover of our Aug. 28 issue—which hit newsstands Aug. 23, with a corresponding comparison to the greatest teams in history online—when the Dodgers fell into a tailspin that they have yet to escape. Through Aug. 25, they had gone 91-36 for a .717 winning percentage, which put them on a 116-win pace, good enough to tie the 2001 Mariners for the highest total of the 162-game expansion era. Since then, they’ve lost 10 of 11 to the Brewers, Diamondbacks and Padres, and while they still have an ample cushion to win the NL West and wrap up homefield advantage in the National League playoffs, they’ve shown that even if the infamous Sports Illustrated cover jinx is a myth, this squad is hardly invincible.  –  Sports Ilustrated, September 6

Sports Illustrated Cover Jinx A Myth?

We disagree.

Teams, players, politicians, companies,  markets or, whatever or whoever, always seem to be cover stories either at at their peak or nadir.   For sure,  the Dodgers 51-9 winning stretch was unsustainable, and the law of averages had to kick in.

Black Swans Are Rare

We do admit there are on rare occasions when Black Swans come along that defy all probabilities and shatter age old records.  Rarely.

The 2015-16 Golden State Warriors were one, but couldn’t validate their 73-9 record shattering season, reverting to the mean after executing the biggest choke in NBA championship history.   Blowing a 3-1 lead to the Cleveland Cavaliers.

In other words,  the Warriors lost three games in a row in the NBA finals, 33 percent of what they lost over the 82 game season.  That was one “mean” reversion to the mean!

No more, however.

“The Warriors are going to win forever, if everything stays the same. This season is over. You know, we’re gonna play it out, and the Warriors are gonna win. And then the next year it’s gonna be the same thing.” – Jeff Van Gundy, September 6

Regression To The Mean

What about the [Sports Illustrated] curse? What happens is that some athlete somewhere in some sport will perform way above average. Sports Illustrated has to have something on its cover and so seeks out those athletes who are doing exceptionally well, and picks from among them the one that outperforms them all. In other words, this particular athlete will have performed way, way above average, a rare event. At this point, their picture is shown.

But, lo! In the coming weeks, our poor athlete slumps back to average or even below, disappointing all, and once again proving the validity of the curse.

All that has happened, however, is that the athlete has “regressed to his mean.” The overwhelming probability is for that athlete to perform near his average, which the athlete subsequently does. It’s no slump after all, just a return to regularity.

To say the SI has a “cover curse”, then, is no different than saying a coin has been hypnotized after a “Tail” finally shows up after a successful run of 20 “Heads” in a series of coin flips. – William M. Briggs

What Does The Sports Illustrated Jinx Have To Do With Asset Markets?

First,  markets are not immune to the magazine cover curse.  We can recall many covers that were contrarian calls of market tops or bottoms.

Probably the most famous was BusinesWeek’s August 1979, The Death of Equities, cover.

The stock market had been in a decade long bearish funk.  The cover didn’t mark the end of the bear market as it banged around another seven months with the S&P500 falling another 8.6 percent bottoming in March 1980.  The market didn’t break out into the multi-decade bull run a few years later in August 1982.   Timing is tricky but close enough for government work.

The stock market had performed way below its long-term average performance, everyone was bearish on equities and had sold out, including BusinessWeek.  Ergo, regression to the mean with some overshooting.

Yes,  markets almost always overshoot, not only to the downside but also to the upside.

Current Asset Markets

That brings us to today’s asset markets and U.S. household net worth.

We came across a chart, similar to the one below, which peaked our curiosity and motivated us to crunch the data and come up with our own observations and conclusions.

The Data

The chart is self-evident. We are in another asset bubble.

This one, however, is more complicated.

More of a steel bubble, if you will.

Harder to burst and long lasting as it is created and driven by central bank money.  Credit based money bubbles pop easier and more quickly as they are vulnerable to a lightning fast deleveraging as was the case in the last crisis.

Asset prices, as reflected in household net worth, are once again divorced from economic reality now more than ever before.  In our above analysis, the difference between the time series of household net worth and nominal GDP.

The two series tracked each other very closely for 45 years up until 1997.  Asset prices grow with fundamentals, which, ultimately, are driven by economic growth.

U.S. household net worth is currently 38 percent or more than three standard deviations above the nominal GDP index, where the average difference is only 6 percent for the 65-year sample period.

Greenspan Put

The difference data (net worth less GDP) appears to have become non-stationary – e.g., an unstable mean, etc. — after 1997.

Let’s also not forget the flaws of assuming a normal distribution in asset markets, which have   “fat tails”  and skewed distributions,  which is evident with this data,  post 1997.

It may be the result of many things, including the rise of the internet and moral hazard.

The result of the cumulative effects of 1987 stock market bailout,  the 1995 Mexican Peso bailout, and the 1997 Asian Financial Crisis, where western policymakers immunized investors from taking long-term losses.   Thus, 1997 may have been the year markets finally realized and recognized the “Greenspan Put” was alive and for real.

Deleveraging     

Granted there has been some deleveraging by households since the great recession, mainly in mortgage debt, so some of the increase in net worth could be the result of slower growth in liabilities.  In additon, some may  be due slower nominal GDP growth.

More analysis is needed to confirm these alternative hypotheses but you don’t pay us enough for us to put in the extra effort.

We did construct a nice table for you, however, and our conclusion of the above alternative explanations?  De minimus.

It’s all asset inflation the result of the expansion of global central bank balance sheets.

Pension Entitlements

One of the results that really surprised us most in our analysis was the rapid rise in pension entitlements as a proportion of household wealth.

We don’t view this as positive as about 30 percent of pensions, on average, are currently underfunded.  Either contributions are going to be dramatically increased or pensions will be restructured and future payouts reduced.

Either case will be bad for demand and the economy.

The alternative is to cut current services, which is also already taking place. Again, it will only add to the “clash of generations” and more political conflict.

We eventually believe the pension shortfalls will become so large the federal government will be forced to nationalize and monetize them leading to inflation.  We have a lot of experience in countries that have resorted to such policies.

Unfunded pensions are nothing more than “fake wealth.”

Conclusion

Several times a week I walk with a good friend who could have played center field for the Cleveland Indians.   But he had a higher calling.  Let’s call him Joltin’ Joe (JJ).

We have been friends for years and have seen many asset cycles.

We live in a lovely county in Northern California, which is in the midst of another raging housing bubble.   The median income for the county is around $61,000, up about 16 percent from the year 2000.   The median house price is $639,000,  which has more than doubled from $319,000 in March 2012.

Fundamentals dictate that the median price should be, more or less three and half times the median income, or around $215,000.   Let’s add another $50K for the California sunshine premium,  though it was 111 degrees here on Saturday!

At an expected or fundamental value of $265,000, that puts the current median home price in our county 140 percent overvalued.

In general, housing prices should move with inflation and wages.  Such a large change in relative prices is a massive transfer of wealth from the young to the older generations, who own most of the housing stock.

That is if the young are gullible enough to pay these prices.  Again,  more potential conflict leading to the clash of generations.

JJ’s Observations

JJ likes to talk about the housing market.   He is very astute noting that this housing bubble is different than the last one just ten years ago.  There isn’t the leverage that there was in 2007.

A lack of supply drives this housing bubble

Hedge funds, private equity firms, and other investors swooped in during the crash and bought up many of the modest homes in foreclosure.   They then foreclosed on the buyers and are now raising rents on their newly owned homes.

People, such as “The Foreclosure King”  (and you know who I am talking about), who would be living under a bridge or freeway if they were not bailed out by the U.S. taxpayer and the Fed during the financial crisis, somehow think they deserve and are entitled to their dubiious created wealth.    Now they are gouging the younger renters, some of who they probably foreclosed on,   who are now priced out of the market and can’t afford to buy a home.   These people are the new “welfare queens.”

Wonder why the body politic is so angry?

Economic anxiety will only lead to greater political instability.

A Mean Regression To The Mean

JJ is not an economist.  I tell him to be patient unless he wants to day trade and try and flip houses, which can be very profitable if your timing is right and you get out before the bubble pops.

There are few people who do,  however.  Greed usually overpowers common sense when you’re making that kind of easy money.

Assets, whether it be stocks, bonds, emerging market debt, or houses will eventually regress to their mean or fundamental value.  They inevitably always overshoot, creating incredible buying opportunities.

Just as the Los Angeles Dodgers are now doing, regressing to the mean and overshooting their true potential, while in the midst of their own Sports Illustrated jinx.

Diiferent Type Of Asset Bubble

This asset bubble is different.

It is larger, encompasses almost all asset classes, may inflate much further, will  likely last longer than many expect, and will be harder to burst because the global central banks have taken $13-15 trillion in assets out of the markets, creating artificial asset supply shortages,  and repressed interest rates to zero or below.  Leaving few alternatives but to chase risk assets.

Enjoy riding the bubble.  It is fun making money in bubbles and you can become very rich if you time it and get out it time.

It is getting late, however, and there are an increasing number of events looming on the horizon that can knock the markets for a loop.

Also be careful on the short side.  Wait for the markets to break.

When the bubble does burst, and it may take some time, it will be one helluva “mean” regression to the mean.

Or it could crash next month.  Timing is tricky.

We are waiting for the S&P500 to make the cover of Sports Illustrated.  We may waiting a long time, however, as very few believe these asset markets are driven by real lasting organic fundamentals.

Good luck, comrades.

Norway’s Big Fish Story

Submitted by Nick Kamran – Letters from Norway

Decision Season

With Parliamentary elections looming, more Norwegians than usual are asking themselves the tough questions. It is now apparent that the slump in oil is not a temporary one. What will the country do now? Time for the lottery winner, after receiving the last annuity, to get a job before burning out the savings. Many are looking towards the sea, fishing and exploiting underwater natural resources. Others are looking to blast open the mountains to do the same.

However, commodity based economies, third-world in nature, are subject to mother nature’s whims, innovation, and ruthless competition.  Moreover, it creates complacency, catching the nation off guard when there is a shift in the supply curve (instead of hitting peak oil, the opposite happened). Hence, the decisions or lack thereof, made during the next four years will impact future generations. Two generations of Norwegians grew up on the delusion that their society, built on pre-socialist values and high oil prices, can endure any challenge. 

The Fund’s withdraws could accelerate amid a global financial crisis: politicians burning cash to shore up the economy and secure votes.

Burn Rate

Taking the sovereign wealth fund (The Fund) for granted, many fail to realize that the underlying investments are all pinned to the prevailing low-interest rate climate. If inflation gets out of control and rates must be pushed up to cut it off, the effect on stock and bond values could be substantial.

Norwegian GDP growth correlates to oil prices.

Currently, assuming constant tax revenues, budget and oil fund value, Norway is in great shape: able to fill the budget gap for the next 30 years. But then what? Also, one must ask, how often do assumptions, which depend on everything remaining constant, endure the test of time? Is it possible to dodge a decade’s worth of black swans, some of which haven’t even been born yet? Based on observation, most believe that a miracle will happen, like it did in the past (stumbling onto one of the largest oil reserves just offshore), or the situation will just work itself out.

The New Normal

Yesterday’s lows are today’s highs: far off the $70/barrel required to balance the budget.  Technology turned oil, a once scarce resource, into an abundant commodity.

Rising rig counts rose, in the latest months, despite flat to downward trending oil prices, indicate lower break-even prices.

The technology from the American Energy Renaissance, is going global, offering all nations additional options, regarding energy sources. In addition to continuously improving fracking technology, clean coal, natural gas, wind, and geo-thermal sources, further reducing the need for imported hydrocarbons.   

The Fish Story vs. Reality

Although many Norwegian leaders believe that the nation can switch from one commodity to another, fish cannot replace oil.  However, the Norwegian Salmon’s strong brand equity could be diminished by increased on production on the back of industrial techniques. Moreover, commodity production, especially this kind, can be replicated worldwide.

The coastlines of the UK, Iceland, Greenland, Canada, Chile, Maine, Alaska, Japan, and Russia offer similar habitats, suitable for fish farming, like those of coastal Norway.  Moreover, fish farming is not rocket science. The required equipment is available on Alibaba.  Perhaps that’s where Salmar bought their latest system.

Sources: Statistics Norway: SSB.no and Fish Information and Services (FIS.com)

In addition to the law of supply and demand realities, new entrants joining the marketplace as long as profit opportunity exists, industrial fish farming offers a new set of problems:

• Sea Lice poses one of the greatest challenges. Concentrated and congested in relatively small pens, the critters spread quickly, contaminating entire batches. Although the lice itself is not harmful to humans, it kills the fish. Currently, the Norwegian Ministry of Food and Industry states that there is a high risk of fish dying from lice between Karmøy and Sotra. Sometime soon, they will have a color code system (red, yellow, or green), overlaying a map of the nation’s coastlines, indicating risk levels.

• Escapes post a major environmental hazard similar to that of Kudzu in the American South. When the genetically engineered (GMO) fish find their way into the open seas, they inevitably breed with the wild fish, weakening and mutating them. Based on a recent study, the problem is widespread.

Scientists tested half the rivers in Norway and found that every wild Atlantic Salmon population contains significant “Frankenstein” genes, introduced by the GMOs.  Escapes happen when storms tear open the containment nets, freeing hundreds of thousands of Salmon. Also, sloppy handlers and smolt (baby salmon) can slip out of containment system. The problem was so widespread in 2013 after a major “jailbreak”, which freed 127,000 fish, that a major fish producer offered a bounty: $90 per recaptured fish.

Nutritional differences exist between farm raised and natural salmon. Source: Alexandra Morton – an activist in Canada. Norwegian salmon distinguishes and defines itself on quality. Mass production could diminish that advantage. 

Fish, especially Salmon, are an important component to the Norwegian economy but considering the public expenditure, marketplace competition, and industry risks outlined above, it will not carry the country forward.

Debt Fueled Economy

Nevertheless, Norway continues to party on.  The nearly trillion-dollar sovereign wealth fund can carry the nation forward until they find a strategic replacement to oil: but for how long?

Norwegian consumers are some of the most indebted in the world while the national government runs accelerating deficits in the face of a declining oil industry.  Source: SSB.no and the Norwegian Ministry of Finance

There are risks that could shorten that ability. Consumer debt, fueled by excessively low interest rates and rapidly growing money supply as well as a widening budget gap, could stoke a crisis. Such a crisis, generally international in nature, could also hit asset prices in a time of need, reducing the lead time from 30 years to perhaps 10. Imagine withdrawals accelerate while The Fund’s value takes a hit from a major stock market pullback and bursting of the bond bubble?

Source: SSB.no M1 ,M2 & M3 Money Supply Aggregates. It is quite apparent that once issued, currency is hard to take back. Norwegians are not supposed to discuss this but rather just trust in Norges Bank.

Sadly, very few Norwegians understand the underlying economics tied to their prosperity, blindly believing the headlines and Central Bank headline statements.  Who is richer, the guy with a new BMW bought on credit or the used Chevy bought with cash? Culturally, there is a lot of public trust in Norges Bank (The Norwegian Central Bank) and the mainstream media.  No one appears to question the consequences of simultaneously persistent negative real interest rates and rising in money supply (systematic currency destruction and standard of living degradation).

Based on street level observations and conversations with the politicians, campaigning for the September 11, 2017 general election, it appears that “kick the can down the road” is the way to go.  Politics is the art of delaying a decision until it is no longer relevant. Hence, they could burn this fund out, trying to buy votes for the next elections, taking place every two years (alternating national and local elections every two years).

The Critical Need for Leadership vs. Management

Generally, Norwegians are overly skeptical, unimaginative, and cautious, hindering their ability to innovate and invent on a grand scale.  Letting a generation slide by without thinking about the future affirms that. There is no industry stepping in to cover oil, revealed in the trade figures above.

Instead of investigating the facts about the Paris Agreement, Norwegian leaders jumped on the bandwagon, signing the speculative and flawed agreement because everyone else did.

Europeans love per-capita statistics. Very few nations can compete with Minnesota in innovation.

Instead, they should have used their influential position, regarding environmental issues, to question the underlying science.  The agreement is based on speculation and voluntary compliance by third-world nations, still struggling with human rights and corruption. If Trump had not withdrawn from the Paris Agreement, the world would have become complacent, believing the environmental crisis was solved.  Essentially, they would have falsely believed that India could enforce the rules.

On paper and at the UN, such nations can say anything. However, the reality on the ground is very different.  Considering India’s massive population and the public sector pay scale, individual factories will operate “business as usual,” paying bribes to the uninterested civil servants, getting them off their back. It is naïve to think otherwise. 

Living in Northern Brazil for a brief time, I personally witnessed farmers and ranchers blatantly cut down rain forest, despite the rules, to expand grazing land. Hence, Russia and China will outright lie.  Then, twenty years from now, we will be in the midst of an environmental disaster, caused by unaccounted third-world development.

Remember, that Hitler’s Germany, built up a military in secret, unleashing it on the world by surprise. The solution to climate change and environmental havoc requires much more than a piece of paper designed to crippled American development to the benefit of third world nations.

Therefore, the Paris Agreement would have doomed the planet, offering a delusion that problem had been “solved” after signing. Much needed attention to the environment would have been diverted to something trivial like removing offensive statues.  Environmental issues go far beyond emissions. It also includes plastic in the oceans, clean drinking water, and deforestation in India, Africa, and South America.  

The Paris Agreement forgot those issues. Our allies should have seen through this fallacy and expressed interest in real solutions, especially the Norwegians.

Thor’s Hammer

Hence, Norwegians need to elect a decisive “Viking like leader.” Someone with lofty ambitions and ideals who is daring, seizing the opportunity with Thorium. The land of fire and ice not only holds around 15% of the world’s thorium supply but also leads in reactor technology development. Thor Energy (Halden, Norway) is in the second phase of a five-year trial, validating the viability as a commercial energy source.

This technology offers the basis to a comprehensive environmental solution that would not only cover emissions but also take care of ocean plastic, deforestation, and chronic poverty. Integrating it with other existing Norwegian technologies: shipbuilding (Aker), automated garbage sorting (Tomra Systems), autonomous systems (Kongsberg Defense) and heavy engineering (Kongsberg Maritime) and working with North African leaders, Norwegian industry could fill the massive Sahara Desert with water, terraforming it into a lush rain forest and vast fields.

The Genesis of New Greenland

Running massive Thorium powered desalinization plants, pumping water into the dessert underground over the next 100+ years, vegetation and eventually forests could take root. A new society would emerge, built on green values and sustainable technologies. That concept would do more to ensure our planets survival than a piece of paper, written by professional politicians intended to upend America. 

But how could we make this happen? It would require the massive integration of existing technologies and proven concepts:

The massive dessert, larger than the United States, was once a rain forest, recycling massive amount of CO2. Thorium technologies could restore that quicker than the Paris Agreement could lower temperatures by .5 degrees over the same time period.

• Ship Building: Norway is already a leader in specialty ships and the floating nuclear reactor concept has been around for over 50 years. Once the people in Halden industrialize the Thorium concept, they can mount the reactors onto highly automated ships, ensuring safety, security, efficiency. 

Two types of ships are needed. The first would be one that generates electricity and desalinizes seawater. The second type would collect ocean plastic, turning into drip irrigation equipment.  

• Electricity created by the onboard powerplant could be delivered from ship to shore by undersea cable, directly into a modern grid.

• Desalinization technology, using excess heat generated by nuclear powerplants, already exists. For the past 20+ years, India, Japan, and Kazakhstan have been doing this on an industrial scale. 


• Drip Irrigation tubing, pipes, and other fixtures can be made from recycled ocean plastic onboard a thorium powered ship as it collects plastic from the massive Pacific Ocean plastic patch (it is the size of Mexico). Water would be delivered by pipeline from the shipboard plant to shore, distributed underground and directly to the plant root systems.

Israel has already proven that drip irrigation works: growing crops in the dessert with almost 90% less water than by open air.

Drip Irrigation in Libya, sourcing water from an underground aquifer. It would be better to use purified seawater, preserving the underground systems. Therefore, It is already possible to grow forests in the desert with this technology.

• Modular Housing Components, also made from ocean plastic onboard the Thorium powered collections ships, could provide a place to live for many of the worlds displaced people and SJW’s. The houses could be covered in Earth and vegetation protecting residents from the elements in a cost-efficient manner.  Those same people could also work in the field cultivating various crops for export and consumption, making this model sustainable.

Dirt prefabricated homes – Green Magic Homes Over time, the dessert above in Libya could look like this. Eventually a rainforest canopy could take root, furthering the reduction of carbon-dioxide.

The rainforests throughout the world act as our planet’s lungs, cycling carbon dioxide into oxygen.  Hence, this concept would not only clean up the ocean but also turn the dessert into a rain forest over the next few hundred years, permanently and naturally balancing carbon dioxide instead of depending on human compliance.

The question is who would pay for it and what would be the return?

• National government funds in Europe set aside for refugees could be spent on making them a new nation, which they will have a part in building and take pride in.

• Bored billionaires like Mark Zuckerberg, Bill Gates, Warren Buffet, Elon Musk, Richard Branson, and George Soros who supposedly want to do some good in the world.

• Multi-National Corporations that supported the Paris Agreement and oppose President Trump.

• The return would be from crop and electricity exports as well as tourism.  In addition, this new nation would be leaders in ocean plastic recycling innovation, selling housing solutions throughout the world. Norway could be at the forefront as an investor and benefactor.  

Conclusion

The greatest consequences of Nordic socialism are how it instills a lack of courage and imagination when facing global problems. For such a system to work, people must be mostly compliant and amicable. Currently, Norway can manage the economic shift by drawing from The Fund but I would hope that they want to do more than just get by. It is obvious that betting on fish is a bad idea.

However, culture of modesty and skepticism holds them back. Norway needs to think big if it wants to maintain the standard of living for future generations. They need to move beyond apps and electronic gadgets to true innovation: the kind that changes the world.  

Think about that when voting on September 11, 2017!

"Visions Of Cataclysms": Why Eric Peters Is Starting A Long-Vol Fund

Is the recent streak of record low volatility about to end?

While countless analysts, pundits and traders have previously talked their book (if not staked their reputation) on claims VIX is set for an imminent mean-reverting spike, so far that has not happened and in fact net spec positioning in the VIX just hit a record short print as of the latest CFTC week.

And yet, on Friday night, in a notable change to the low-vol regime, Interactive Brokers announced it would hike volatility product margins ahead of what it warned could be a 100% surge in the VIX, a move which will be promptly copied by most if not all trading platforms. Will this then become a self-fulfilling prophecy - should maringed out traders decide it makes more sense to close out vol shorts than to add more cash - it is too early to know, however, in a separate confirmation that the current low-vol regime may be ending, last week JPM"s quant strategy team reported that "following robust performance in 1H ‘17, PnL of short vol premia stagnated over the past month... We see further risk for short vol from both rate increase as well as CB balance sheet renormalization."

YTD, short vol PnL (+5.1%) exceeds that of traditional beta (+4.2%) and value (+4.1%). Momentum YTD PnL of -5.2% arose from a broad-based decline across global equity indices (-5.1%), sovereign bonds (-2.1%), currencies (-1.4%) and commodities (-12.0%). Carry was flat (+0.9% YTD) as it was buffeted by positive bond carry (+3.9%) and negative equity index carry (-1.6%). Over the past month, short vol has stagnated at 0.26% and momentum has continued its decline by - 0.71%.

And with no further P&L to be made from selling vole, the question again emerges: is the vol-selling party coming to an end?

To answer that question today in abstract terms, we give the podium to our favorite Sunday morning commentator, One River Asset Management"s CIO Eric Peters, who today in lieu of his traditional weekend notes, has penned a piece titled: "The Case for Long Volatility" in which he explains that a surge in volatility is inevitable for one simple reason: human imaginations will soon run rampant with visions of cataclysms... something which that other derivatives guru, DB"s Aleksandar Kocic also said precisely two months ago, when he predicted that the "Market"s Current "Metastability" Will Lead To "Cataclysmic Events."

Some of the key excerpts from Peters" note:

To sell implied volatility at current levels, investors must imagine tomorrow will be virtually identical to today. They must imagine that bond yields won’t rise despite every major central bank looking to hike interest rates and exit QE. They must imagine that economies at or near full employment will not create inflation; that GDP will neither accelerate nor decelerate; that governments will tolerate historic levels of income inequality despite citizens voting for the opposite; that strongly rising global debts will be supported by decelerating global growth. And volatility sellers must imagine that nine years into a bull market, amplified by a proliferation of complex volatility-selling strategies and passive ETFs with liquidity mismatches, that we will dodge a destabilizing shock to market infrastructure. I can imagine a few of those things happening, but neither sustainably nor simultaneously. It is much easier to imagine a tomorrow that looks different from today.

Zero interest rates and quantitative easing left yield-starved investors with few ways to achieve their target returns. Wall Street’s engineers developed many wonderful solutions to this problem. Their magnificence is matched only by the amount of negative convexity now lurking in investment portfolios.

As volatility declined, investors have had to sell even more of it to sustain sufficient profits. This selling reinforces the trend lower, which produces an illusion that legacy volatility shorts are less risky today than yesterday. Lower volatility thus begets lower volatility. And this also ensures that quantitative models reduce overall portfolio risk estimates, which allows (and in many cases forces) investors to buy more assets at prevailing prices. This in turn reduces volatility, reflexively. Naturally, the reverse is also true. Rising volatility begets rising volatility. And given the unprecedented volatility-selling in this cycle, I can imagine a historic reversal.

And at that point, investor imaginations will run rampant with visions of cataclysms. It is always thus, it is who we are. Confidence in a tomorrow that is indistinguishable from today will vanish, replaced by some new hysteria. It could be real or imagined. It could even be a bullish blow-off mania like 1999. Or maybe an endogenous crash, like 1987, when market moves were disconnected from the real economy. But the catalyst doesn’t really matter. What matters is recognizing that at this late stage, with implied volatility where it is, and asset valuations where they are, if you can imagine a tomorrow even modestly different from today, you must begin finding thoughtful ways to get long volatility.

Peters has imagined precisely that, and as a result, the CIO writes that he sees a "compelling opportunity developing in the months ahead" to go long volatility, and is launching a fund to capture it.

* * *

His full note below (link):

The Case For Long Volatility

I have an active imagination. A blessing and curse. I’m not alone. Of our many defining features, imagination is the greatest single thing separating us from other creatures. There is no higher power. Our ability to conceive of a tomorrow that is better than today is a precondition to discovery, invention. And these two things quite naturally stack, compound. Their summation has lifted us from the Stone Age to the space station. The journey has only just begun. This should be obvious to everyone but the most hopeless pessimist.

Along our upward trajectory are periodic interruptions. Some are natural, such as plagues. Others are economic, particularly depressions. But most are political, and the greatest arise when nations imagine future states of the world that are different and incompatible. These ideological conflicts can be devastating, lasting for years as hot or cold wars, but even so, they have barely restrained our rise. The motive force of humanity’s imagination, ambition, and drive to build better lives for our children is such that nothing has suppressed progress for long.

Economically speaking, our ascent is defined by rising productivity, the spoils of which determine prosperity. In modern times, we have imagined various ways to distribute this wealth; socialism, communism, free-market capitalism. I can imagine other approaches; the Chinese are exploring one. But even within existing constructs, there are nuances. Today in the West, capital owners collect a disproportionate share of profits relative to laborers. There is no intrinsic reason that this degree of inequality cannot persist. But in modern history it never has.

The private sector overwhelmingly sees itself as a more capable steward of research and development capital than governments. However, an examination of innovations traceable to state-funded initiatives during the past century suggests otherwise. I suspect the failure of Soviet communism led western free-market capitalists to imagine every element of our system to be superior. I imagine someday we will regard that black and white conclusion as foolish. China’s unprecedented economic rise and breathtaking technological advances should prompt Western self-reflection. So far it has not. I can imagine this being forced upon us.

In fact, I can imagine many things. I can imagine almost everything, except of course, things that never cross my mind. Those are unknown unknowns, Black Swans. In my lifetime, not a single such creature has reversed human progress, let alone markets. Not for long anyway. Lehman was not a Black Swan. I worked there for seven years and we spent most of them imagining the firm abruptly failing. Black Swans are generally magnificent, indistinguishable from magic - the internet, smartphones, cloud computing, quantum entanglement. The big risks are skewed to the upside, and manifest frequently. That is why we no longer live in caves. Yet periodically, our imaginations run wild with visions of cataclysms. I imagine that will never change.

In theory, investors compound savings at a rate commensurate with the upward slope of human progress. But people can pay anything they choose for assets and their derivatives. They periodically earn higher returns than that slope would indicate by bidding up prices far in advance of actual growth. However, they cannot do so forever without the gap between today’s reality and tomorrow’s promise becoming a chasm, prone to collapse. That said, almost any price can be justified if the slope of progress steepens, and every so often, something new appears that allows investors to imagine it will. But in modern history it never really has.

This leads me to investing. Which is principally about medium to long-term trend following. To obsess over much shorter time horizons is to imagine you can consistently outsmart people who imagine themselves smarter than you. A quick check on the number of billionaires who made their fortunes imagining such nonsense will tell you all you need to know on that topic. Anyhow, trend following is theoretically easy; over the long-term conditions improve. But because we base asset prices partly on their future value, and as every solvent investor imagines that trajectory to be upward, prices are almost always elevated relative to today’s reality - and thus prone to corrections. So trend following is easier said than done, and can be improved upon by periodic tactical adjustments, hedges.

With that in mind, it is hard to overstate the extraordinary nature of today’s landscape. All previous periods of extreme asset valuation required investors to imagine a vastly different tomorrow, a wildly optimistic future, a steeper slope. But today they expect the opposite. Due to unfavorable demographics and over-indebtedness, investors expect the slope to flatten, perhaps forever. Yet because of this flattening, they also imagine perpetually low interest rates, which they then use to justify extreme valuations across other asset classes in an endogenous loop that is increasingly disconnected from the real economy. This is the dominant pricing model for global assets today. I can imagine it continuing for a while still, but not in perpetuity.

Implied volatility is the price that connects two sets of people; those seeking to offload risks and those prepared to shoulder them. When imaginations are running wild, implied volatility is high, reflecting disagreement and uncertainty about what those risks are, and/or how they will resolve themselves. Low implied volatility reflects just the opposite. We are now at historic lows.

To sell implied volatility at current levels, investors must imagine tomorrow will be virtually identical to today. They must imagine that bond yields won’t rise despite every major central bank looking to hike interest rates and exit QE. They must imagine that economies at or near full employment will not create inflation; that GDP will neither accelerate nor decelerate; that governments will tolerate historic levels of income inequality despite citizens voting for the opposite; that strongly rising global debts will be supported by decelerating global growth. And volatility sellers must imagine that nine years into a bull market, amplified by a proliferation of complex volatility-selling strategies and passive ETFs with liquidity mismatches, that we will dodge a destabilizing shock to market infrastructure. I can imagine a few of those things happening, but neither sustainably nor simultaneously. It is much easier to imagine a tomorrow that looks different from today.

Investment banks and asset managers devise creative strategies to make money once valuations exceed reasonable levels. These perpetual prosperity machines typically combine leverage and alchemy, transforming real risk into perceived safety. Examples abound. But in this cycle, a proliferation of cleverly disguised volatility-selling strategies has dominated. Zero interest rates and quantitative easing left yield-starved investors with few ways to achieve their target returns. Wall Street’s engineers developed many wonderful solutions to this problem. Their magnificence is matched only by the amount of negative convexity now lurking in investment portfolios.

As volatility declined, investors have had to sell even more of it to sustain sufficient profits. This selling reinforces the trend lower, which produces an illusion that legacy volatility shorts are less risky today than yesterday. Lower volatility thus begets lower volatility. And this also ensures that quantitative models reduce overall portfolio risk estimates, which allows (and in many cases forces) investors to buy more assets at prevailing prices. This in turn reduces volatility, reflexively. Naturally, the reverse is also true. Rising volatility begets rising volatility. And given the unprecedented volatility-selling in this cycle, I can imagine a historic reversal.

And at that point, investor imaginations will run rampant with visions of cataclysms. It is always thus, it is who we are. Confidence in a tomorrow that is indistinguishable from today will vanish, replaced by some new hysteria. It could be real or imagined. It could even be a bullish blow-off mania like 1999. Or maybe an endogenous crash, like 1987, when market moves were disconnected from the real economy. But the catalyst doesn’t really matter. What matters is recognizing that at this late stage, with implied volatility where it is, and asset valuations where they are, if you can imagine a tomorrow even modestly different from today, you must begin finding thoughtful ways to get long volatility.

And just like that, the "fat tails" funds are back.

John Mauldin: "One Of These 3 Black Swans Will Trigger A Global Recession"

Authored by John Mauldin via MauldinEconomics.com,

Exactly 10 years ago, we were months way from a world-shaking financial crisis.

By late 2006, we had an inverted yield curve steep to be a high-probability indicator of recession. I estimated at that time that the losses would be $400 billion at a minimum. Yet, most of my readers and fellow analysts told me I was way too bearish.

Turned out the losses topped well over $2 trillion and triggered the financial crisis and Great Recession.

Conditions in the financial markets needed only a spark from the subprime crisis to start a firestorm all over the world. Plenty of things were waiting to go wrong, and it seemed like they all did at the same time.

We don’t have an inverted yield curve now. But when the central bank artificially holds down short-term rates, it is difficult if not almost impossible for the yield curve to invert.

We have effectively suppressed the biggest warning signal.

But there is another recession in our future (there is always another recession), which I think will ensue by the end of 2018. And it’s going to be at least as bad as the last one was in terms of the global pain it causes.

Below are three scenarios that may turn out be fateful black swans. But remember this: A harmless white swan can look black in the right lighting conditions. Sometimes, that’s all it takes to start a panic.

Black Swan #1: Yellen Overshoots

It is clear that the US economy is not taking off like the rocket some predicted after the election:

• President Trump and the Republicans haven’t been able to pass any of the fiscal stimulus measures we hoped to see.

• Banks and energy companies are getting some regulatory relief, and that helps; but it’s a far cry from the sweeping healthcare reform, tax cuts, and infrastructure spending we were promised.

• Consumer spending is still weak, so people may be less confident than the sentiment surveys suggest. Inflation has perked up in certain segments like healthcare and housing, but otherwise it’s still low to nonexistent.

Is this, by any stretch of the imagination, the kind of economy in which the Federal Reserve should be tightening monetary policy? No—yet the Fed is doing so.

It’s in part because they waited too long to end QE and to begin reducing their balance sheet. FOMC members know they are behind the curve, and they want to pay lip service to doing something before their terms end. 

Plus, Janet Yellen, Stanley Fischer, and the other FOMC members are religiously devoted to the Phillips curve. 

The black-swan risk here is that the Fed will tighten too much, too soon. 

We know from recent FOMC minutes that some members have turned hawkish in part because they wanted to offset expected fiscal stimulus from the incoming administration. That stimulus has not been coming, but the FOMC is still acting as if it will be.

What happens when the Fed raises interest rates in the early, uncertain stages of a recession instead of lowering them? Logic suggests the Fed will curb any inflation pressure that exists and push the economy into outright deflation.

Deflation in an economy as debt-burdened as ours is could be catastrophic. 

Let me make an uncomfortable prediction: I think the Trump Fed—and since Trump will appoint at least six members of the FOMC in the coming year, it will be his Fed—will take us back down the path of massive quantitative easing and perhaps even to negative rates if we enter a recession.

The urge to “do something,” or at least be seen as trying to do something, is just going to be too strong.

Black Swan #2: ECB Runs Out of Bullets

Relative to the size of the Eurozone economy, Draghi’s stimulus has been far more aggressive then the Fed’s QE. It has pushed both deeper, with negative interest rates, and wider, by including corporate bonds.

Such interventions rarely end well, but this one is faring better than most.

Europe’s economy is recovering, at least on the surface, as the various populist movements and bank crises fade from view. But are these threats gone or just glossed over? The Brexit negotiations could also throw a wrench in the works.

Anatole Kaletsky at Gavekal thinks Draghi is still far from reversing course. He expects that the first tightening steps won’t happen until 2018 and anticipates continued bond buying (at a slower pace) and near-zero rates for a long time after.

But he also sees risk and makes an important point.

The US’s tapering and now tightening coincided with the ECB’s and BOJ’s both opening their spigots. That meant worldwide liquidity was still ample. I don’t see the Fed returning that favor. Draghi and later Kuroda will have to normalize without a Fed backstop—and that may not work so well.

Black Swan #3: Chinese Debt Meltdown

China is by all appearances unstoppable.

GDP growth has slowed down to 6.9%, according to official numbers. The numbers are likely inflated, but the boom is still underway.

Ambrose Evans-Pritchard reported some shocking numbers in his July 17 Telegraph column.

A report from the People’s Bank of China showed off-balance-sheet lending far higher than previously thought and accelerating quickly. (Interestingly, the Chinese have made all of this quite public. And President Xi has taken control of publicizing it.)

The huge increase last year probably reflects efforts to jump-start growth following the 2015 downturn. Banks poured fuel on the fire, because letting it go out would have been even worse. But they can’t stoke that blaze indefinitely.

President Xi Jinping has been trying to dial back credit growth in the state-owned banks for some time; but in the shadow banks that Xi doesn’t control, credit is growing at an astoundingly high rate, far offsetting any minor cutbacks that Xi has made.

A market in which “they all think the government will save everything” is generally not one you want to own—but China has been an exception. It won’t remain one forever. The collapse, when it comes, could be earthshaking.

It is very possible that any of these black swans could trigger a recession in the US. And let’s be clear: The next US recession will be part of a major global recession and will result in massive new government debt build-up.

It will not end well.

WTI Jumps Above $50 On Report US Prepping Sanctions Against Venezuela Oil Industry

After both Brent and WTI rose above their respective 50DMAs on Friday, capping 2017"s best weekly rally for oil, the rising tide is accelerating as the latest CFTC COT data confirmed, when net specs boosted bullish Nymex WTI crude oil bets by 27K net-long positions to 423K, the highest in two months, as producers continued to cover short hedges, sending their net position to the most bullish since the summer of 2015.

Meanwhile, oil started the Sunday session jumping out of the gate, with WTI rising above $50 for the first time since May in early Asian trading, following the usual non-material weekend chatter and "noise" out of OPEC (which to exactly nobody"s surprise "can"t stop pumping"), however what has attracted traders" attention, is a WSJ report that following last week"s latest round of sanctions, and after today"s vote to overhaul Venezuela"s constitution further entrenching Maduro"s unpopular regime, US government officials are considering announcing sanctions against Venezuela"s oil industry as early as Monday, although as the WSJ notes, a full-blown "embargo against Venezuelan crude oil imports into the U.S. is off the table for now."

In its latest escalation, last Wednesday the U.S. government levied additional sanctions on 13 high-ranking Venezuelan officials for alleged corruption, human-rights violations and undermining democracy in the South American country. On Friday Mike Pence vowed “strong and swift economic actions” if the vote goes ahead.

While Maduro"s government has responded defiantly, "dismissing sanctions and warnings from Washington", with Maduro insisting the government would notch a triumph in Sunday’s vote, the potential collapse in oil trade between Venezuela could crippled the country even more, while sending the price of oil sharply higher.

In fact, in a note from last week posted here, Barclays Warren Russell explains just what will happen should Trump expand Venezuela"s sanctions to impact its oil sector: "a sharper and longer disruption (eg, exceeding three months) could raise oil prices at least $5-7/b and flatten the curve structure despite an assumed return of some OPEC supply, a more robust US shale response, and weaker demand. It may be just the opportunity OPEC needs to exit its current strategy. US producer hedging activity would pick up if WTI moves to $50-55, limiting price upside potential."

Furthermore, among the downstream consequences, is that refining margins should deteriorate if Venezuelan crude oil supply is curtailed. US refiners will be negatively affected by any sanctions related to trade constraints. On the other hand, China and India could benefit if Venezuelan oil is offered at a discount to comparable grades, Barclays suggests.

Finally, looking at Venezuela from a longer-term perspective, this is how Barclays estimates the local investment climate:

It is too early to assess the investment appetite in Venezuela in a post-Maduro environment. Though Venezuela’s assets are large, they are not short-cycle. Companies with deep connections to the country are likely to maintain a presence, but wait for the political landscape to stabilize before making incremental investments. Either way, it looks like Venezuela’s production trend is down over the near term.

Of course, the higher the price of oil goes, the more profitable shale will be, the more oil it will produce and so on, in the diabolic feedback loop that will assure oil does not go too far above $50 for the foreseeable future, as Goldman explained efficiently in just three bullet points last Thursday:

• Oil prices have rebounded over the past month on large inventory draws, a declining US rig count and strong demand data, suggesting that the rebalancing is accelerating.


• We remain, however, cautiously optimistic on prices from the current level with the recent improvements in fundamentals needing to be sustained for oil prices to rally meaningfully further.


• In fact, too large a price recovery now would only increase the downside risks to our year-end $55/bbl WTI price forecast given the fast velocity of shale’s supply response.

At which point it"s back to square one. For now, however, the bulls get to enjoy the next few days until the momentum reverses once again.

* * *

For those who are eager for more reasons to buy oil, there are more details in the full Barclays excerpt below and posted here first last week:

Looming risk of sanctions against Venezuela

The Trump administration is considering a wide variety of sanctions against the Venezuelan regime, which could range from sanctions on several senior government officials to targeting PDVSA’s ability to transact in US dollars, according to Reuters. This would not be the first time the Trump administration has taken action against Venezuela. The US already imposed sanctions on Venezuela’s vice president (February 2017), eight members of the Supreme Court (May 2017), and other military and government officials. The most recent Supreme Court sanctions were in response to the court’s decision to disband the democratically elected congress. The administration’s recent discussion of potential new sanctions would aim to keep elections “free and fair” and prevent President Maduro from being able to establish a dictatorship, which could occur as early as July 30.

The Trump administration is likely to proceed cautiously and incrementally with any sanctions. In contrast to the energy-related sanctions imposed on Russia and Iran, the more entrenched connections between US companies and consumers and the Venezuelan oil industry lead us to believe that the US administration will take a cautious approach.

Venezuela produces around 2.2 mb/d of oil and NGLs, which represents roughly 2% of the global petroleum market. Its Orinoco heavy oil plays a critical role as a feedstock for complex refineries around the world, particularly along the US Gulf Coast. Close to half of its 1.8 mb/d of oil exports go to OECD countries, with Asia consuming most of the remainder. Venezuela is the third largest exporter of oil to the US (?750 kb/d), behind Canada (3.2 mb/d) and Saudi Arabia (1.1 mb/d).

As a guide to potential outcomes, we examine US sanctions on Iran and Russia and their impact on the oil market. We find that the sanctions on Russia have not had a noticeable effect on its production or the oil market, while sanctions against Iran lowered its production and exports and supported oil prices. For more on sanctions on Russia and Iran, see the Appendix of this report.

We see several important differences between the situation in Venezuela and those in Iran and Russia.

1. Unlike Russia and Iran, Venezuela is at significant risk of political and economic collapse. Low oil prices have greatly reduced the government’s ability to pay its outstanding debts while funding imports of basic goods. As a result, President Maduro has taken decisions that have resulted in a deteriorating quality of life for Venezuelans in recent years. Amid the current instability, even limited sanctions are likely to have an outsized effect on the oil market.


2. A collapse in Venezuela could turn it into a regional crisis. More than 1.5mn Venezuelans have already fled the country because of the current crisis, this number could increase exponentially, affecting neighboring countries, particularly Colombia. The international community will need to support the region in a refugee crisis. In the case of Colombia, the situation could have additional implications because there are nearly 2mn Colombian and Colombian descendants living in Venezuela. Those people would likely be the first to cross the border and the Colombian government cannot deny them their rights as Colombian citizens. This could become significant fiscal burden for the Colombian government.
   Venezuela needs to import oil and refined products to produce oil. Roughly 50% of Venezuelan production is heavy oil, which is typically blended with diluent for transportation purposes. Without access to diluent imports from the US and elsewhere, certain Orinoco projects may be at risk of being shut-in. A trade embargo, sanctions that affect PDVSA, or a sovereign default could be catalysts for heavy oil shut-ins in the Orinoco. We estimated earlier this year that a default could take around 300 kb/d of heavy oil production offline (Commodities special report: The black swans of 2017, January 2017).


3. The current state of Venezuela’s refinery sector necessitates fuel imports, which have been met in part by imports from the US. Plagued by underinvestment, Venezuela’s refineries have been running well below nameplate capacity, with Bloomberg recently reporting that the Puerto La Cruz refinery is running at 15% utilization. Restricting fuel shipments to Venezuela would result in increased dependency on the PDVSA’s dilapidated plants and imports from other origins to prevent the country coming to a standstill.


4. Venezuela’s oil sector is much more intricately connected to the North American energy system, due to CITGO’s presence in the US and the dependence of other US refineries on Venezuelan feedstock. This interdependency with the US and the lesser connection with other OECD countries, mean Venezuela’s position in the international energy system is quite different to that of Russia or Iran.

If the US does impose further sanctions on Venezuela, it would likely take into account these differences. The use and timing of various sanctions will likely depend on how much the conflict escalates in the coming days and whether other factors (such as the potential for default on sovereign debt payments due in October and November), might be a catalyst for political change in the near future. In our view, if the Trump administration decides to issue sanctions, it would proceed conservatively and become increasingly restrictive only if its goals are not being achieved. One of the stated goals of the Trump administration is for Venezuela to hold “free and fair elections,” according to the White House press statement on July 17, 2017. Before implementing more aggressive sanctions, the administration is likely to seek multilateral support from other nations.

The EU recently expressed a willingness to impose sanctions on Venezuela as well. We believe sanctions could turn out to be a double-edged sword. Multilateral sanctions implemented after having exhausted negotiations are most likely to be successful. Nonetheless, history shows that sanctions alone are not enough to trigger political change, eg, Cuba, North Korea, and Syria. This finally depends on the level of internal pressure, which in Venezuela seems high.

Sanctions against individuals

Additional US-imposed sanctions against government officials may be the next step. Such sanctions are likely to cause some inconvenience but probably would have only a limited impact on Venezuela’s oil industry, in our view.

Sanctions on Venezuela’s energy sector

Sanctions could take several forms, ranging from sanctions similar to those imposed on Russia to more disruptive ones that could completely halt existing operations.

• Sanctions that prohibit or limit investment in new exploration and production activity would not likely have an immediate direct impact on Venezuelan production. Many of the companies with equity stakes in Venezuela’s new greenfield developments are headquartered in non-OECD countries. Furthermore, due to the current upstream investment environment and the increasing political risk within Venezuela, we believe upstream spending on greenfield projects is limited, with many projects shelved for future reconsideration.


• Sanctions prohibiting businesses from operating in Venezuela would be much more disruptive to Venezuela’s current contribution to the oil market. A policy that would limit US producer and service company operations and further investment in Venezuela, would require PDVSA and other international companies to step in to maintain operations. This scenario is likely to exacerbate Venezuela’s declining production profile.

Sanctions against PDVSA

The US could take an even more drastic approach by issuing direct sanctions against PDVSA. In an extreme scenario, if the NOC is banned from banking activity in the US and from trading with US entities, the impact would likely be swift and very damaging to Venezuelan oil production. Directly targeting PDVSA will also likely lead to a sovereign debt default in 2017. This action would affect Venezuela’s petroleum imports and exports.

• PDVSA would have to find new destinations for nearly half of its oil exports, assuming production does not collapse. Currently, Venezuela ships more than 700 kb/d of oil to the US and nearly 100 kb/d to the EU. China and India would likely be alternative destinations for some of this crude.


• PDVSA would also need to find a new source for some of its diluent needs. Algerian and Nigerian crude and condensates were previously used for diluent purposes and could substitute for shipments of US crude and products used in the transport of heavy oil. PDVSA could ask it JV partners to import diluent, but the capacity to do this would depend on the extent of sanctions and other countries’ participation. Even if possible, this could also increase the production cost of these fields to levels that are not financially viable, which could ultimately result in shut-ins.

We believe the US would implement such measures only as a last resort. In addition, the US would likely seek multilateral support from other nations before taking this route. Such an action is likely to be severely disruptive to Venezuela as well as the oil market and its participants.

Sanctions against PDVSA would likely also mean that US producers and service companies conducting business in Venezuela would have to cease operations, which would have an outsized effect on oil production compared to the effect of the US-imposed sanctions on Russia. Compared with Russia, Venezuela is much more reliant on foreign oilfield service companies for oil extraction.

Discussions of broader sanctions likely limits Venezuela’s access to capital

Regardless of whether new sanctions are imposed, discussion of broader sanctions could limit the Venezuelan government’s ability to raise financing and to make debt payments coming due in October and November. Moreover, it could change the government’s willingness to pay. If the current government wants to remain in control and not negotiate, it may be unwilling to use the few assets left to service its debt. As mentioned above, default alone would have a significant impact on oil production and the domestic economy.

The US could sell oil from the SPR to steady the market

We believe the US would consider the sale of oil from the strategic petroleum reserve (SPR) in order to smooth any price volatility that may result from a disruption to supply from Venezuela. The previous US administration was willing to tap the SPR to steady markets after the Libyan supply disruption, and we believe the current administration would consider this option as well. The US did not sell oil from the SPR during the 2002-03 Venezuelan supply disruption and prices rose by more than 40% during that period, although other factors also contributed. We doubt a disruption will result in a 40% price increase in the event of a supply disruption, but we think prices will rise nonetheless. For this reason, we think the US government would consider using the SPR as a backstop.

At present, we believe the price response to a disruption would be more muted than previous disruptions due to the apparent increased willingness of the US to use its SPR, the fact that OPEC could raise quotas, and US producers would begin to respond to sustained higher prices.