"Credit Negative For U.S. Government": Moody's Threatens Downgrade If Trump Tax Plan Is Passed

As various institutions continue to publish very detailed estimates of how Trump"s tax plan will impact the federal budget, which is somewhat amazing since income brackets haven"t even been assigned yet, Moody"s published a note today threatening to finally strip the U.S. of its AAA credit rating if the tax plan is ultimately passed as currently contemplated.

President Donald Trump’s tax proposal would probably weigh on the U.S. government’s credit outlook, on concerns that it would cause the federal deficit to swell, according to Moody’s Investors Service.

“The Trump tax framework is likely credit negative for the U.S. government,” Moody’s said in a statement. “Tax cuts would not be offset by equivalent cuts to spending, which would put upward pressure on the federal budget deficit and debt,” while “the tax reform’s effect on economic growth and, in turn, federal government revenue would also affect U.S. credit strength.”

By contrast, banks, insurers and asset managers would benefit from a lower tax rate, Moody’s said.

As we pointed out last Friday, the Tax Policy Center found that Trump"s plan would cost $2.4 trillion over the first decade, assuming no spending cuts, and result in federal deficits soaring by several hundred billion dollars each year. 

• The proposal would reduce federal revenues by $2.4 trillion over the first ten years and $3.2 in the second decade. This means that absent a matched deduction in spending, US deficit and debt will increase by a similar amount. This is a problem as a Senate GOP budget resolution unveiled on Friday only allows for adding $1.5 trillion to the debt, implying a revenue shortfall of just under $1 trillion.
  
  • The business income tax provisions—including those affecting corporations and pass-through businesses—would reduce revenues by $2.6 trillion over the first ten years. Elimination of estate and gift taxes would lose another $240 billion. The individual income tax provisions (excluding those related to business income) would increase revenues by about $470 billion over the same period.
  
  

So, just to summarize Moody"s position on this issue, a ~$1.5 trillion budget deficit in 2009 was no problem at all but a ~$1 trillion budget deficit today would suddenly merit a downgrade.

Of course, the Trump administration has argued that increased GDP growth will offset lower tax receipts and actually result in lower deficits rather than higher. 

To that end, Deutsche Bank"s economists took a shot a estimating what kind of GDP boost could be expected from the Trump tax plan and found that a 0.4% - 0.5% boost might be reasonable...

Given the size and scope of the tax plan presented, it is worthwhile to investigate the potential macroeconomic implications of the bill. We use the Fed’s model of the US economy (FRB/US) to do just that.

The full tax plan provides a meaningful lift to growth in the coming years (Figure 7). Year-over-year growth in Q4 2018 and Q4 2019 is about 0.4pp and 0.5pp higher than the no ?scal stimulus baseline.  Higher growth leads to a tighter labor market. The unemployment rate falls to 4% by end-2018 and 3.85% by end-2019 under the full plan, 0.2pp and 0.35pp below the baseline with no tax cuts (Figure 8). The more modest, and in our view more realistic, tax plan intuitively produces more modest results for growth and the unemployment rate. Growth is higher by about 0.2pp and 0.3pp, and the unemployment rate is 0.1pp and 0.2pp lower, by end-2018 and end-2019, respectively.

...that said, they also found that any increase in growth expectations would just be offset by quicker interest rate hikes from the Fed.

Despite assuming a gradual response by the Fed, the implied fed funds rate is significantly higher in response to the tax cuts, as the Fed at least partially o?sets the further decline in the unemployment rate below NAIRU (Figure 9). By end-2018, the fed funds rate would be 13bp higher in response to the full tax plan and 5bp higher under the more modest tax plan scenario. The gap between the no-stimulus scenario and tax cut scenarios is considerably wider further out. By end-2019, the fed funds rate would be 40bp higher in response to the full tax plan and 20bp higher under the more modest tax plan scenario. These differences rise to 60bp and 30bp by end-2020 – more than two hikes more under the full tax cut scenario and more than one additional hike under the modest stimulus compared with the baseline.

Of course, the most comical part of all of this is that, after years of exponential debt growth, Moody"s has finally decided that Trump"s tax cuts will be the final straw that forces them to strip the U.S. of its pristine debt rating...

Auto Defaults Soar On The Back Of "Hasty Loans And, At Times, Outright Fraud"

In the years after its 2009 bankruptcy, Chrysler looked for a dedicated lender to help customers "finance their cars quickly"...which was code for a lender who could help the struggling OEM expand their market share by making extremely risky loans to subprime borrowers all while laying off the credit risk to unsuspecting pension funds.  As such, Chrysler ultimately picked Santander due to its expertise in “automated decisioning”...which was code for the ability to advance credit without actually performing income verification tests on borrowers.

For a time, Chrysler and Santander enjoyed a perfect symbiotic relationship as it offered Santander an opportunity to aggressively expand in the U.S. subprime loan market, and Chrysler, the perennial third wheel among the “Big Three,” was able to target customers that were previously deemed untouchable by lenders.  Of course, as Bloomberg points out today, the problems surfaced almost from the start.

Many of them, detailed in the settlement between Santander and authorities in Delaware and Massachusetts, recall some of the excesses of the subprime housing era.

Attorneys general in both states alleged Santander enabled a group of “fraud dealers” to put buyers into cars they couldn’t afford, with loans it knew they couldn’t repay. It offloaded most of the debt, which often had rates over 15 percent, reselling them to yield-hungry ABS investors.

State authorities also said an internal Santander review in 2013 found that 10 out of 11 loan applications from a Massachusetts dealer contained inflated or unverifiable incomes. (It’s not clear whether this particular case involved a Chrysler dealer.)

Santander kept originating the dealer’s loans anyway, even as they continued to default “at a high rate,” the authorities said.

Some dealerships even asked Santander to double-check customers’ incomes because they didn’t trust their own employees, the authorities said. They also said the lender didn’t always oblige because that would put it at a “competitive disadvantage.” At the time of the settlement, Santander said it was “totally committed to treating its customers fairly.”

All of which at least partially explains why auto defaults are soaring to post-crisis highs even as equity markets continue to shrug off bad data.

Of course, it wasn"t just a few dealers in Delaware and Massachusetts that caused auto defaults to soar.  As we pointed out back in May, the problems at Santander were pervasive with the lender apparently only verifying income on roughly 8% of the loans they subsequently dumped into ABS facilities and sold off pension and insurance companies. 

Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just 8 percent of borrowers whose loans it recently bundled into bonds, according to Moody’s Investors Service.

The low level of due diligence on applicants compares with 64 percent for loans in a recent securitization sold by General Motors Financial Co.’s AmeriCredit unit. The lack of checks may be one factor in explaining higher loan losses experienced by Santander Consumer in bond deals that it has sold in recent years, Moody’s analysts Jody Shenn and Nick Monzillo wrote in a May 17 report, which reviewed data required of asset-backed bond issuers that’s recently been made available.

Limited verification of loan applicants’ stated incomes and employment “creates more uncertainty around whether borrowers will be able to afford their monthly payments, which becomes particularly important if they have poor credit records and risky loan terms,” the analysts wrote.

Of course, Wall Street’s voracious appetite for high-yield investments has kept the loans - and the subprime ABS bonds - coming.  You can"t possibly expect those overpaid, ivy league-educated financial analysts to be discerning when it comes to credit risk.

In recent years, lending practices in the subprime auto industry have come under increased scrutiny. Regulators and consumer advocates say it takes advantage of people with nowhere else to turn.

For investors, the allure of subprime car loans is clear: securities composed of such debt can offer yields as high as 5 percent. It might not seem like much, but in a world of ultra-low rates, that’s still more than triple the comparable yield for Treasuries. Of course, the market is still much smaller than the subprime-mortgage market which triggered the credit crisis, making a repeat unlikely. But the question now is whether that premium, which has dwindled as demand soared, is worth it.

“Investors seem to be ignoring the underlying risks,” said Peter Kaplan, a fund manager at Merganser Capital Management.

But, just like with the subprime mortgage bubble, we suspect the extra 50 bps of yield garnered from moving down the credit quality curve will ultimately prove to be slightly less than sufficient compensation.  Luckily, much of the losses will reside with America"s already bankrupt pension funds which means that taxpayer will get the opportunity to step in and fix everything.

Carson Block Says "Laws Of Economics" Dictate China Will Face "Day Of Reckoning"

Muddy Waters Research founder Carson Block believes that China’s overleveraged economy will eventually face a “day of reckoning.” He just can’t say when.

During an interview with Bloomberg’s Erik Schatzker, Block, who made his name betting against shady Chinese companies trading in the US, explains how the Chinese government’s massive stimulus has led to a potentially destabilizing explosion of corporate-debt growth in the world’s second-largest economy – and why the Communist Party won’t be able to contain the fallout once its twin bubbles -asset and credit - finally burst.

“I’ve felt for many years that it’s a giant asset and credit bubble. Under the old orthodoxy, that couldn’t be sustained for long, but if you look around the world, the ECB and the Fed are helping to sustain frothy asset values. Japan hasn’t made sense for a while.”

“Ultimately there will be a day of reckoning, I know that. I just can’t say if it’ll be two months, two years or 20 years.”

But even though traders who bet against the Chinese yuan last year made a tidy profit, Block believes betting against the Hang Seng Index isn"t the best option for shorting China because the impact of PBOC intervention is too unpredictable on a macro scale. Betting against the Chinese stock market in aggregate could end up being a “widow maker” play like shorting Japanese government bonds was for several years. 

Instead, investors should bet against individual firms or sectors – a less-risky option, in Block’s view.

“If you start with the macro thesis and say there are a lot of credit problems in China then start looking at industries that might be canaries in the coal mine or companies that might be canaries in the coal mine, then you might get it right.”

However, speculators should be mindful of a trait common among Chinese companies: There are many that somehow manage to keep going even though the financials suggest that they’re doomed. Understanding which companies have the guanxi – a Chinese term meaning business and political connections – to enable them to continue operating, and which companies don’t, is the most challenging aspect of betting against Chinese firms, Block asserts.

But what about the bull case for China? The argument that the Chinese government will be able to pull off a “soft landing” while successfully transitioning from a manufacturing powered to a services-powered economy is predicated on the view that Xi Jinping and the Communist Party exercise absolute control over the economy, and have near-unlimited resources to help them thwart an economic collapse.

Block says this assumption, common among westerners, is an example of “cognitive dissonance” often applied to the PBOC. Even though many westerners believe it to be true, China’s central bank isn’t some all-powerful monolith, Block contends.

“These guys are no more capable than our policy makers in the US have been. The US government has the most power in the world to avert a major economic catastrophe.”

Speaking of the crash of 2008…

“If [the Fed and Congress] weren’t able to prevent it, it’s because the laws of economics, the physics of economics eventually catch up.”

“I’m willing to bet that these guys can’t escape the laws of economics in perpetuity.”

The PBOC’s April decision to deleverage unleashed turmoil in the country’s financial markets, causing Chinese stock and bond markets to erase hundreds of billions of dollars in value.

Beijing announced Friday morning that it has moved the goal posts once again and introduced a new “counter-cyclical factor” to its mechanism for managing the yuan’s exchange rate with the dollar - an effort to curb volatility. The move sent the yuan to three-month highs, but traders are still unclear about how this new mechanism works and what exactly was changed.

The Chinese yield curve experienced a “double inversion” this week when three year yields eclipsed five year yields and seven year yields eclipsed 10-year yields. At the same time, rising base funding costs and interbank credit risk concerns have pushed banks" cost of borrowing beyond the rate they charge customers for loans for the first time in history. The one-year Shanghai Interbank Offered Rate has exceeded the Loan Prime Rate, the first time this has happened since the latter was introduced in 2013.X

Meanwhile, China"s total debt-to-GDP has reached all-time highs.

Moody’s Investors Service sent offshore yuan tumbling earlier this week after it downgraded China’s credit rating to A1 from Aa3, saying that the outlook for the country’s financial strength will worsen, with debt rising and economic growth slowing. This leaves the world"s hoped-for reflation engine rated below Estonia, Qatar, and South Korea and on par with Slovakia and Japan.

Are US Taxpayers Now On The Hook For Risky Wall Street Real-Estate-Backed Bonds?

Authored by Mike Krieger via Liberty Blitzkrieg blog,

I’m fairly certain very few of you have heard of broker price opinions, or BPOs, but it’s something I think we should all become aware of given the influence of BPOs in the market for valuing residential real estate securitized bonds.

Before we get to that, let’s revisit a little contemporary American robber baron history. In the immediate aftermath of the U.S. financial crisis, financial oligarchs immediately got to work helping Main Street climb out of the Wall Street created ditch by buying foreclosed homes from hordes of newly destitute Americans and then renting them back to those same people.

I wrote many articles about this trend over the years, starting with the January 2013 piece, America Meet Your New Slumlord: Wall Street. Here’s an excerpt:

Well they aren’t really your “new” slumlord in the sense you have been debt slaves to the financials system for decades.  What I really mean is that it is now becoming overt and literal.  Literal because financiers are now the main players in the real estate market and are buying all the homes ordinary citizens were kicked out of over the past few years.  Yep, we bailed out the financial system so that financiers with access to cheap credit can buy up all of America’s real estate so that they can then rent it back to you later.

Fast forward a few years, and private equity is frantically packaging these real estate rental properties into bonds. In order to value the real estate collateral you need some sort of appraisal, but the normal process of actually looking at properties is seen as too costly and time consuming, so market players are cutting corners by using “broker price opinions,” or BPOs.

As Bloomberg reports, this practice is coming under increased scrutiny and for good reason:

U.S. securities regulators are investigating whether bonds backed by single-family rental homes and sold by Wall Street’s biggest residential landlords used overvalued property assessments.

Radian Group Inc.’s Green River Capital unit is one of the market participants that received a request for information from the Securities and Exchange Commission in March about broker price opinions, or BPOs, the company said in a regulatory filinglate Friday. Green River provides BPOs that are used to value real estate in securitizations.

The agency has been looking at whether BPOs were wrongly inflated, and similar letters were sent to other companies, potentially serving as a starting point for an industrywide probe, according to a person with knowledge of the matter. The person asked not to be identified because the matter is private.

Green River is one of several firms that provide BPOs to the units of private-equity firms and other investors who bought up hundreds of thousands of properties in cities across the U.S. after the housing bubble burst. Many of them focused on distressed homes whose owners were evicted during the Great Recession.

Never forget, what’s good for Wall Street is good for Main Street! Also, they hate us for our freedoms.

Broker price opinions are a cheaper and less-stringent way to evaluate what a property is worth than an appraisal. Property valuations are a sensitive subject in the housing industry because regulators said inflated appraisals contributed to the housing bubble a decade ago.

The biggest private-equity landlords, led by Blackstone Group LP’s Invitation Homes, have sold more than $15 billion in bonds since 2013 backed by some 120,000 rental homes, according to data from Morningstar, and many of those deals were valued using BPOs. One recent bond deal tied to Invitation Homes was backed by guarantees from U.S. taxpayers.

Please tell me this is a joke.

The BPOs are key elements in securitizations, determining basic figures such as how much rent to charge tenants, how much leverage and risk is embedded in the deal and how much investors could recover if the bonds go sour. Many of the securities were assigned AAA grades and sold off to investors such as pension funds.

Is this 2006 or 2017?

No here’s where it gets truly disturbing.

In traditional real estate deals, these opinions help establish sales prices, but in these bond deals, they help estimate how much could be recovered in a liquidation. Some analysts say the BPOs they don’t take into account a possible plunge in home prices, and the values tend to be more optimistic than a full appraisal. Unlike appraisals, BPOs also aren’t necessarily done by a licensed professional, nor does the inspector always go inside to look around, which is standard procedure for an appraisal.

In one April securities offering of about $944.5 million, Green River submitted BPOs that relied on “drive-by” evaluations, and homes were “assumed to be repaired and in good condition,” according to a deal prospectus issued by Fannie Mae. The BPO “is not intended to be a representation as to the past, present or future market values of any of the properties.”

The underlying mortgage in that deal, tied to rental properties owned by Invitation Homes, was guaranteed by Fannie Mae. That’s the first time a taxpayer-backed home finance company has guaranteed such a loan. Freddie Mac is also looking into getting involved in the market by providing its guarantee.

When private equity landlords opted to use BPOs instead of appraisals in their securitizations, some investors expressed skepticism and bond graders applied discounts to the BPOs. Moody’s Investors Service, for example, applied a 15 percent haircut to BPO valuations when grading a transaction last August, citing inherent risks of using BPOs on residential properties instead of an appraisal.

I’m sure it’ll be fine, and if not who cares? The U.S. taxpayer is always available for a good fleecing.

"The Retail Bubble Has Now Burst": A Record 8,640 Stores Are Closing In 2017

        “Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst.”

        - Richard Hayne, Urban Outfitters CEO, March 2017

The devastation in the US retail sector is accelerating in 2017, and in addition to the surging number of brick and mortar retail bankruptcies, it is perhaps nowhere more obvious than in the soaring number of store closures.

While the shuttering of retail stores has been a frequent topic on this website, most recently in the context of the next "big short", namely the ongoing deterioration in the mall REITs and associated Commercial Mortgage-Backed Securities and CDS, here is a stunning fact from Credit Suisse:"Barely a quarter into 2017, year-to-date retail store closings have already surpassed those of 2008."

According to the Swiss bank"s calculations, on a unit basis, approximately 2,880 store closings were announced YTD, more than twice as many closings as the 1,153 announced during the same period last year. Historically, roughly 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimates that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings, which suggests that for brick-and-mortar stores stores the current transition period is far worse than the depth of the credit crisis depression.

As the WSJ calculates, at least 10 retailers, including Limited Stores, electronics chain hhgregg and sporting-goods chain Gander Mountain have filed for bankruptcy protection so far this year. That compares with nine retailers that declared bankruptcy, with at least $50 million liabilities, for all of 2016. On Friday, women’s apparel chain Bebe Stores said it would close its remaining 170 shops and sell only online, while teen retailer Rue21 Inc. announced plans to close about 400 of its 1,100 locations.

Broken down by retailer, either in bankruptcy or not yet:

Another striking fact: on a square footage basis, approximately 49 million square feet of retail space has closed YTD. Should this pace persist by the end of the year, total square footage reductions could reach 147M square feet, another all time high, and surpassing the historical peak of 115M in 2001.

There are several key drivers behind the avalanche of "liquidation" signs on store fronts.

The first is the glut of residual excess retail space. As the WSJ writes, the seeds of the industry’s current turmoil date back nearly three decades, when retailers, in the throes of a consumer-buying spree and flush with easy money, rushed to open new stores. The land grab wasn’t unlike the housing boom that was also under way at that time.

“Thousands of new doors opened and rents soared,” Richard Hayne, chief executive of Urban Outfitters Inc., told analysts last month. “This created a bubble, and like housing, that bubble has now burst.”

The excess retail space means that North America has a glut of retail outlets, as well as far too many shopping malls, something which is becoming apparent as sales per capita decline. On a per capita basis, the US has roughly 24 square feet of retail space per capita, more than twice the space of Australia and 5 times that of the UK.

The over-storing, including the influx of fast-fashion and off-price chains, has resulted in a brutally competitive landscape that made difficult for retailers to raise prices. “A pair of men’s dress pants costs less today than they did a decade ago,” Manny Chirico, chief executive of Calvin Klein and Tommy Hilfiger parent PVH Inc., said in a recent interview.

* * *

Then there are retail rental rates, which across top US markets, such as New York, remain the highest in the world. For years, retailers could afford the egregious demands by landlords. But as overall traffic and volumes have declined, this has also prompted an exodus of outlets even among the most desired locations, leading to a surge in "fors rent or lease" signs popping up in unexpected places like Madison Avenue"s "golden mile."

According to the FT, on New York’s Fifth Avenue, the world’s most expensive shopping street, vacancy rates have jumped from 10 per cent a year ago to 16 per cent, according to Cushman & Wakefield. Rents there have fallen for the first time since the recession “and the trend is not over”, the consultancy warns. Vacancy rates across SoHo have climbed to 18 per cent, from 12 per cent a year ago, according to Jones Lang LaSalle.

The newfound caution among retailers has had a “very significant and fast” negative impact on retail property, says Chris Conlon, chief executive of Acadia Realty, a real estate investment trust. 

It is not just prestigious streets that have been hit. Malls are also hurting, as chains from Sears to Macy’s shut hundreds of stores. Analysts at Green Street Advisors argue that “low growth is the new normal”, while market rents are becoming decoupled from tenants’ revenue growth as more sales move online. 

“[Rents] are at a price point now that exceeds what retail sales can perform,” says Spencer Levy, global head of research for CBRE. He notes that a stronger US dollar also hurts sales in New York, where deep-pocketed foreigners historically flock for deals.

* * *

Then there is the online migration, which recently made Jeff Bezos, owner of Amazon, the world"s second richest man.

As the WSJ adds, as retailers rushed to expand their physical footprint, the internet was gearing up to do to apparel companies what it had already done to booksellers: sap profits and eliminate what little pricing power these chains commanded.

Despite the view that shoppers prefer to try on clothing in physical stores, apparel and accessories are expected this year to overtake computers and consumer electronics as the largest e-commerce category as a percentage of total online sales, according to research firm eMarketer.

Helena Cawley, 37 years old, said she used to be a “die-hard” department-store shopper. But with two small children, the Manhattan entrepreneur doesn’t have time to visit physical stores the way she once did. “I buy much more online now,” she said. “With free returns and free shipping, it’s so easy.”

Ironically, that shift to online shopping has come at a high cost to retailers. It is less profitable to do business online than in a brick-and-mortar store, largely due to the higher shipping, customer-acquisition and technology costs of the digital world. Retail margins on average fell to 9% last year from 10.5% in 2012, according to consulting firm AlixPartners LP. Over that period, e-commerce sales increased to 15.5% of total sales from 10.5%. The internet has also made it easier for consumers to comparison shop, thereby erasing any pricing leverage retailers may have had. “The internet has acted as the great price equalizer,” said Joel Bines, the co-head of Alix’s retail practice.

* * *

Yet while the retail bubble may have burst, does that mean the conventional brick-and-mortar industry is doomed? Perhaps not:

Retailing has gone through shakeouts before, whether it was the superstores such as Wal-Mart Stores Inc., Target Corp. and Kmart that killed mom-and-pop shops, or category killers like Barnes & Noble Inc. and Toys “R” Us Inc. that did the same to smaller booksellers and toy chains. And even today, there are chains that continue to grow, such as off-price retailer TJX Co s., which is opening hundreds of stores under its Marshalls, T.J. Maxx and HomeGoods banners, as it steals market share from Macy’s Inc. and other traditional department stores.

“This is not the end of retailing as we know it,” Mr. Bines said. “People are not going to stop going to stores.”

He"s right, however in the meantime there will be an avalanche of defaults: compounding the retail decline is the debt that retailers have added to their balance sheets in recent years, either through leveraged buyouts or to fund share buybacks. That leverage has become a problem as profits dry up. According to Moody’s Investors Service, the amount of debt coming due for 19 distressed retailers is set to more than double over the next two years.

Many retailers were slow to seize on the significance of these changes. When business was bad during the 2015 holiday season, many chains blamed unusually warm weather. But when the most recent holiday season once again failed to produce robust sales growth, “retailers realized this was a structural change,” Credit Suisse analyst Christian Buss said.

With all that in mind, is Amazon assured of becoming the world"s first trillion-dollar stock, perhaps hitting the milestone even before Apple? Perhaps, then again, chains such as Wal-Mart have stepped up their game. In a bid to better compete with Amazon.com , the giant retailer has been scooping up e-commerce startups, including Jet.com and ModCloth. And just this past week, PetSmart Inc. bought Chewy.com, a fast-growing online rival.

Others have given up waiting for a recovery that seems always out of reach and are settling into what appears to be the new normal. “We’re planning as if the environment is not going to improve,” Jerry Storch, chief executive of Saks Fifth Avenue and Lord & Taylor parent Hudson’s Bay Co., told analysts earlier this month. In the meantime, expect more store closures, more bankruptcies (recall "According To Fitch These Eight Retailers Will File For Bankruptcy Next"), and, of course, far lower asset prices, both for retail equities and mall REITs, as well as the underlying CMBS securities that for years funded the US retail (and especially mall) bubble, which has now violently burst.

Korean Sovereign Risk Spikes After Syrian Airstrike

Despite being rated five levels higher than Thailand by Moody’s Investors Service, the cost of insuring South Korea’s bonds against default is now more expensive for the first time in 7 years.

As Bloomberg reports, five-year credit-default swaps on Korean notes have surged in the past couple of days on concern a more aggressive U.S. foreign policy is increasing the risk of conflict with nuclear-armed North Korea.

Meanwhile, the cost of such contracts on Thai debt have more than halved over the past year as the nation’s current-account surplus swelled.

Wall Street Pouring Money Back Into Oil And Gas

Submitted by Nick Cunningham via OilPrice.com,

Despite the near record increase in U.S. oil inventories last week – an increase of 13.8 million barrels – oil prices traded up on February 8 and 9 as traders pinned their hopes on a surprise drawdown in gasoline stocks, which provided some evidence of stronger-than-expected demand.

The abnormal crude stock increase took inventories close to 80-year record levels at 508 million barrels, and is another bit of damming evidence that should worry oil bulls. But the oil markets were not deterred. In fact, that has been a defining characteristic of the market in recent weeks – optimism even in the face of some pretty worrying signals about the trajectory of the market “adjustment” process.

More signs of optimism abound. Wall Street is pouring the most money into oil and gas companies in the U.S. since at least 2000, according to Bloomberg. In January alone, drillers and oilfield service companies raised $6.64 billion in 13 different equity offerings. "The mood is absolutely different," Trey Stolz, an analyst at the investment banking firm Coker & Palmer Inc., told Bloomberg. "Go back to a year ago and the knife was still falling. But today, it feels much, much better."

Moreover, the money raised for these U.S. companies represented more than two-thirds of the total $9.41 billion in new energy equity issued across the globe in January. Big Finance is ready to pour money back into the oil and gas sector and they are doing it mostly in the U.S. 

The industry should see more activity this year as companies rush to conclude deals ahead of the rebound. A new report from Moody’s Investors Service predicts that M&A activity will rise substantially in 2017. “E&P acquisitions and divestitures dropped off when commodity prices collapsed in late 2014, but have significantly ticked up since mid-2016,” the Moody’s report says.

 A lot of the action, unsurprisingly, is occurring in the Permian Basin. Austin-based Parsley Energy just announced its decision to spend another $2.8 billion on Permian acquisitions. The additional 71,000 net acres will give it one of the largest holdings in the Permian for an independent company. “It’s really been remarkable what Parsley’s been able to do,” Jackson Sandeen, Wood Mackenzie’s chief Permian Basin analyst, told the Houston Chronicle. “The company’s been on a tear.” Parsley has spent more money in the Permian this year than any other company besides ExxonMobil, which spent more than $6 billion in January to double its holdings in the Permian.

Wood Mackenzie says that 2017 will be even larger than 2016 in terms of the value of deals in the Permian. Last year, the industry spent $24 billion in mergers and acquisitions, a colossal sum that turned the basin into the hottest play in the country. Land prices skyrocketed as capital flowed into West Texas. But Wood Mackenzie says that less than two months into the New Year, the industry has already spent half of that amount in the Permian.

Moody’s cautioned that the valuations of some of the deals in the Permian might have become too large. The high prices might fall back a bit as the bubble deflates. Nevertheless, the ratings agency sees more money pouring into E&Ps, pipeline companies, oilfield service companies and refining. “As oil and natural gas prices stabilize at higher levels, increasing confidence in industry prospects will spur further acquisition activity in 2017,” Moody’s wrote.

The boom in the Permian will now lead to a rash of deals in the midstream sector, as more pipelines are needed to carry the larger flows of oil. FuelFix reports that companies like Magellan Midstream Partners and Enterprise Products Partners are rushing to build new pipelines from West Texas to Houston and the Gulf Coast, allowing more Permian oil to be processed and refined or exported abroad.

In short, the sentiment in the oil patch continues to improve even as oil prices have faltered in the low-to mid-$50s per barrel. That has translated into a record net-long position from hedge funds and other money managers, an incredible build up in bullish bets on oil.

The flood of money back into the industry portends a strong rebound in 2017. It could also leave a lot of people and companies on the hook if oil prices fall back again.