Saturday, April 25, 2015

New York Fed: "Credit Supply and the Housing Boom"

From the Federal Reserve Bank of New York's Liberty Street Economics blog:

There is no consensus among economists as to what drove the rise of U.S. house prices and household debt in the period leading up to the recent financial crisis. In this post, we argue that the fundamental factor behind that boom was an increase in the supply of mortgage credit, which was brought about by securitization and shadow banking, along with a surge in capital inflows from abroad. This argument is based on the interpretation of four macroeconomic developments between 2000 and 2006 provided by a general equilibrium model of housing and credit.

The financial crisis precipitated the worst recession since the Great Depression. The spectacular rise in house prices and household debt during the first half of the 2000s, which is illustrated in the first two charts, was a crucial factor behind these events. Yet, economists disagree on the fundamental causes of this credit and housing boom.

Real House Prices

Household Mortgages-to-GDP Ratio
A common narrative attributes the surge in debt and house prices to a loosening of collateral requirements for mortgages, associated with higher initial loan-to-value (LTV) ratios, multiple mortgages on the same property, and expansive home equity lines of credit....MORE

"Private Equity Courts The Well-to-Do"

In our little corner of the investing universe there is too much money chasing too few energy deals.
In everything from solar yieldcos to oil & gas to midstream, there's an awful lot of money sloshing around.
From Barron's Penta:
Blackstone Group, the giant private-equity fund manager, is increasingly targeting wealthy individuals to invest in its ­offerings. Big institutional investors still provide the vast ­majority of capital for these alternative investments, but their commitments haven’t kept pace with fund-raising needs. That has prompted firms like Blackstone to go after well-heeled ­investors and their financial advisors to help fill the gap.

The shortfall has opened an opportunity for wealthy investors interested in diversifying their portfolios to include buyout, ­venture-capital, real estate, and various hedge funds. Account minimums have come down considerably to accommodate individuals, though the fees still make the funds pricey investments.

Blackstone’s (ticker: BX) efforts already are bearing fruit. The company says that roughly 12% of its $310 billion in assets under management comes from high-net worth investors, more than twice the 5% they provided in 2008. Carlyle Group (CG) and KKR & Co. (KKR) also are hunting for individuals’ money.

Overall, high-net-worth investors made up 10% of the money raised for private-equity funds closed between 2012 and 2014, versus 3% in 2009 to 2011, according to private-equity tracker Preqin. In contrast, public pension funds’ total contributions dropped from 28% to 22%. “I ­expect you’ll see a lot more coming in from individual investors,” said David Rubenstein, co-founder of Carlyle Group, on a recent conference call.

Blackstone reportedly raised a hefty $14.5 billion from institutional investors in less than four months for a popular real estate fund. But it also wants to sell an additional $1.3 billion of the fund to high-net-worth investors. It’s just the latest example of Blackstone’s efforts. Last year, it raised a total of $57 billion, with $11 billion coming from high-net-worth investors.

The strategy of reaching out to the wealthy began during the financial crisis when private equity stumbled, losing an estimated 30% to 40% in certain categories. Money raised for private-equity funds industrywide fell 57% between 2008 and 2010, according to Preqin. Even last year’s $539 billion in funds raised fell well short of the precrisis high of $688 billion....MORE

Friday, April 24, 2015

"Glut of Capital and Labor Challenge Policy Makers"

Apparently a surfeit of abundance.*

From the Wall Street Journal:
Global oversupply extends beyond commodities, elevating deflation risk
The global economy is awash as never before in commodities like oil, cotton and iron ore, but also with capital and labor—a glut that presents several challenges as policy makers struggle to stoke demand.
“What we’re looking at is a low-growth, low-inflation, low-rate environment,” said Megan Greene, chief economist of John Hancock Asset Management, who added that the global economy could spend the next decade “working this off.”

The current state of plenty is confounding on many fronts. The surfeit of commodities depresses prices and stokes concerns of deflation. Global wealth—estimated by Credit Suisse at around $263 trillion, more than double the $117 trillion in 2000—represents a vast supply of savings and capital, helping to hold down interest rates, undermining the power of monetary policy. And the surplus of workers depresses wages.
Meanwhile, public indebtedness in the U.S., Japan and Europe limits governments’ capacity to fuel growth through public expenditure. That leaves central banks to supply economies with as much liquidity as possible, even though recent rounds of easing haven’t returned these economies anywhere close to their previous growth paths.

“The classic notion is that you cannot have a condition of oversupply,” said Daniel Alpert, an investment banker and author of a book, “The Age of Oversupply,” on what all this abundance means. “The science of economics is all based on shortages.”
The fall of the Soviet Union and the rise of China added over one billion workers to the world’s labor force, meaning workers everywhere face global competition for jobs and wages. Many newly emerging countries run budget surpluses, and their citizens save more than in developed countries—contributing to what Mr. Alpert sees as an excess of capital.

Examples of oversupply abound.

At Cushing, Okla., one of the biggest oil-storage hubs in the U.S., crude oil is filling tanks to the brim. Last week, crude-oil inventories in the U.S. rose to 489 million barrels, an all-time high in records going back to 1982.

Around the world, about 110 million bales of cotton are estimated to be sitting idle at textile mills or state warehouses at the end of this season, a record high since 1973 when the U.S. began to publish data on cotton stockpiles.

Huge surpluses are also seen in many finished-goods markets as the glut moves down the supply chain. In February, total inventories of manufactured durable goods in the U.S. rose to $413 billion, the highest level since 1992 when the Census Bureau began to publish the data. In China, car dealers are sitting on their highest inventories of unsold cars in almost 2½ years.

Central to the problem is a cooling Chinese economy combined with tepid demand among many developed countries. As China moves away from its reliance on commodity-intensive industries such as steelmaking and textiles, its demand for many materials has slowed down and, in some cases, even contracted.
“This fall in commodity demand is counterintuitive, and we have only seen the tip of the iceberg,” said Cynthia Lim, an economist at Wood Mackenzie....MUCH MORE
*Rather a big deal. See also 2012's "The parable of water", the first post of the 24 part (to date) FT Alphaville series "Beyond Scarcity"

Oil and Conspiracies: Saudi Exports to the U.S.

A couple weeks ago I noted en passant:
We're still looking for another leg down in prices, in part because the Gulf Coast refineries require imported crude (Saudi Aramco didn't build the Motiva facilities to process Bakken light)....
Vis ZeroHedge(buy gold):

A Plot To Hold Down Oil Prices Or Just A Happy Coincidence?
Submitted by Leonard Brecken via,
The recent unprecedented surge in oil imports has again prompted a review of things here. In a prior story, we wrote that the lack of capacity to process light sweet crude at refineries produced via shale plays could be playing a role in the stock build. As mentioned previously, refineries over the next 24 months are expected to add 700,000 B/D in capacity to handle this type of crude. In the meantime, we have noticed an unusual amount of crude being imported, possibly as a result of this imbalance in refinery capacity. Or could it be that a more sinister plot is afoot?

To quantify the scale of the issue, we turn to Cornerstone Analytics’ work in uncovering the magnitude of the impact of imports on the rise in oil inventory stocks. We haven’t seen this level of import imbalance period since 2013, as the chart below demonstrates via Cornerstone. In the past 6 months, the level of imports relative to the requirement or need by refineries has jumped not once but twice. The 1M B/D “gap” goes a long way in explaining the oil inventory stock build which has been 5MB-10MB per week.
If adjusted, the builds over the past 6 months without such imports would not exist at all or at the very least be greatly reduced. So is this occurring as part of the inability of refineries to handle the mix of output domestically or is this part of some plot to build inventories to crash the prices of oil? Quite frankly we can’t say for sure but anomalies such as this must be exposed so that they can be debated given that there has been ample debate on Saudi motivations for holding down oil prices and the ongoing media cheerleading on lower oil prices....
I'm not sure why but Oilprice seems to have an interest in higher prices, in some of their posts over the last few months they have approached cloud cuckoo land levels of spew.
On the other hand they actually watch the right things in the oil markets so who knows?
Anyhoo, if you want to scapegoat Canuckistan is as guilty as the sheikhs:

Weekly Preliminary Crude Imports by Top 10 Countries of Origin (ranking based on 2013 Petroleum Supply Monthly data) 

1- Canada

3,047 2,985 3,293 2,935 3,239 3,228 2010-2015

2- Saudi Arabia

1,107 748 1,300 1,235 1,298 1,297 2010-2015

3- Mexico

593 590 785 818 708 752 2010-2015

4- Venezuela

918 789 657 992 664 923 2010-2015

5- Colombia

229 757 335 417 485 420 2010-2015

6- Iraq

149 168 23 107 219 0 2010-2015

7- Kuwait

153 370 98 496 227 214 2010-2015

8- Nigeria

0 14 139 19 0 152 2010-2015

9- Ecuador

207 368 103 199 109 201 2010-2015


30 104 0 187 0 83 2010-2015


See also our Oct. 2014 post "Price War: 'Texas Refinery Props up US Saudi Imports'",
July 2013's "'North American Crude and Condensate Outlook': What Will U.S. Refineries Use as Feedstocks?" and June 2012 "Big Problem at Aramco/Shell Motiva Refinery So Saudi's Stop Sending Crude".

"Saudi Arabia’s Oil-Price War Is With Stupid Money"

From Art Berman's blog:
Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible. 

Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.
Chart_Saudi Prod & Brent Ap 2015
Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.

Market share is an important part of the motive but Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi recently emphasized that “The challenge is to restore the supply-demand balance and reach price stability.” Saudi Arabia’s need for market share and long-term demand is best met with a growing global economy and lower oil prices.
That means ending the over-production from tight oil and other expensive plays (oil sands and ultra-deep water) and reviving global demand by keeping oil prices low for some extended period of time. Demand has been weak since the run-up in debt and oil prices that culminated in the Financial Collapse of 2008 (Figure 2 below).
Chart_Cons PCT_Demand PCT of Supply WTI CPI 3 April 2015
Figure 2. World liquids demand (consumption) as a percent of supply (production) and WTI crude oil price adjusted using the consumer price index (CPI) to real February 2015 U.S. dollars, 2003-2015. Source: EIA, U.S. Bureau of Labor Statistics, and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Since 2008, the U.S. Federal Reserve Board and the central banks of other countries have further increased debt, devalued their currencies and kept interest rates at the lowest sustained levels ever (Figure 3 below). These measures have not resulted in economic recovery and have helped produce the highest sustained oil prices in history. They also led to investments that are not particularly productive but promise higher yields that can be found otherwise in a zero-interest rate world....MUCH MORE
Figure 4. Slide from Schlumberger CEO Paal Kibsgaard’s presentation at the Scotia Howard Weil 2015 Energy Conference.

Grantham, Mayo, Van Otterloo's 7-Year Asset Class Performance Forecast

We've linked to a dozen or more of the forecasts over the years, see special notes (*) below.
Mish Shedlock via Market Oracle:
As of March 31, their 7-Year Asset Class Real Return Forecast is as follows.
GMO 7-Year Asset Class Real return Forecasts

Feb 2010
"Grantham’s ‘Horrifically Early’ Calls Challenge GMO"
March 2014
How Good Is Jeremy Grantham's Forecasting Record?
His strong pessimism drives GMO managed funds toward the most stable (large capitalization) value stocks, and these funds have performed fairly well (reflecting perhaps a value premium rather than market timing).
See also:
GMO 7-Year Asset Class Real Return Forecasts: 2007

From James Montier’s GMO Quarterly Letter, July 2013, titled The Purgatory of Low Returns, download the full PDF here (registration may be required).

GMO 7-Year Asset Class Forecasts - June 2012
Grantham Mayo 7-year Asset Class Real Return Forecast June 30, 2013

And Sept. 2009
Jeremy Grantham: "GMO’s 7-Year Asset Class Return Forecast"

Thursday, April 23, 2015

"Hedge funds bet big on oil price rally"

Brent $64.81 up $2.08; WTI $57.56 up $1.40.
From the Financial Times:
Hedge funds have placed one of their largest ever bets on a rally in oil prices, just as evidence mounts that energy companies are hunkering down for a delayed recovery.

Exchange data show hedge funds and other large speculators have accumulated a record-breaking number of North Sea Brent futures and options contracts equal to almost 265m barrels of oil — the equivalent of almost three days of global oil demand.

At the same time, oil producers and other physical market players have rushed to lock-in prices, selling forward more than half a billion Brent barrels in a bid to protect against future price falls. It is the highest level since the Intercontinental Exchange (ICE) started publishing position data in early 2011.

The split was clear this week at two major conferences on opposite sides of the Atlantic. Hedge fund managers, bankers and trading houses at the FT Commodities Global Summit in Lausanne, Switzerland, were largely of the view that oil prices have bottomed. Brent hit a 2015 high above $65 a barrel on Thursday, having slumped to a five-year low near $45 a barrel in January.

“We see the supply side falling away very quickly here,” Paul Horsnell, head of commodities research at Standard Chartered, told the FT Summit. Mr Horsnell forecasts Brent could rise above $80 a barrel in the third quarter of this year.....MORE

Questions America Wants Answered: Which Bond Villain Plan Would Have Worked?

When Encore ran their Bond marathon last month we expected a bunch of Bond references from the pundits and had this piece ready to go.
Unfortunately the econ/finance crowd didn't deliver and I forgot the link.
Now corrected.
Thanks be to The Onion for the insightful interrogatory:
Can Anyone Truly Be Said To ‘Own’ The Complete James Bond Collection?

From Vulture, Nov. 9, 2012:

Ask an Economist: Which Bond Villain Plan Would Have Worked (and Which Not)?
A VIEW TO A KILL US / BR 1985 CHRISTOPHER WALKEN rear center. Date 1985.

While the bad guy in Skyfall is obsessed primarily with revenge and humiliation, many of James Bond’s chief adversaries over the years have wanted something more simple and tangible: cash money. The Bond villain is often deranged and grandiose, sure, but he (or she) is also capable of hatching elaborate plans to increase their bottom line, often by secretly manipulating the world’s economic systems (sometimes with the aid of a clandestine nuclear weapon or two). So, could they have succeeded? If James Bond hadn’t foiled these plots, could these Bond villains have fulfilled their dreams of financial glory? We looked through their schemes, and asked Jean-Jacques Dethier, a development economist at the World Bank (and a lifelong Bond fan), what he thought.

Plot: Gold tycoon Auric Goldfinger’s (Gert Frobe) plan is quite simple: He wants to attack the U.S. Bullion Depository in Fort Knox and detonate an atomic bomb, thus irradiating the gold stored there, rendering it worthless for decades. This will in turn increase the value of Goldfinger’s own gold and cause economic chaos in the Western world.

Plausibility: “This looks plausible to me,” says Dethier. “If you irradiate the gold, you can’t touch it — which will effectively reduce the gold supply, at a time when the United States currency was still on the gold standard.” However, there is one potential problem — the vast majority of the gold in the U.S. wasn’t in Fort Knox — it was (and remains) in the basement of the Federal Reserve Bank of New York, in downtown Manhattan. (But most of the gold in New York belongs to other nations, so Goldfinger’s evil plan is still fairly solid.)

Live and Let Die
Plot: Caribbean dictator/drug lord Dr. Kananga (Yaphet Kotto) is practically enslaving the poppy farmers of his nation, and plans to distribute heroin for free through his chain of U.S. restaurants, which he expects will simultaneously put his competitors (such as the Mafia) out of business and also create an America full of addicts. Then, faced with huge demand and no competitors, he will start charging high prices for his heroin.

Plausibility: “This is a bit harebrained,” says Dethier. “First of all, I think you can’t just grow opium poppies anywhere, which is why Afghanistan is considered such a high value location.” Additionally, he notes, it’d be almost impossible to eliminate competitors by monopolizing one drug, since they can still produce and distribute other drugs, such as cocaine and marijuana.

A View to a Kill
Plot: Max Zorin (Christopher Walken) wants to secretly trigger a massive earthquake that will destroy Silicon Valley. This will then allow him and his investor allies to monopolize the microchip manufacturing market.

Plausibility: “As far as I know, microchips aren’t actually manufactured in Silicon Valley,” says Dethier. “They’re made all over the world, in China and other places, though the guys who commission the work may be in Silicon Valley.” Therefore, while taking out Silicon Valley would obviously be cataclysmic for the tech industry, he notes, it also wouldn’t entirely remove your competitors, and wouldn’t ultimately affect manufacturing that much....

Oil: Who Produced How Much Last Month

Brent traded over $64 for the first time this year while June WTI is up $1.79 at $57.95.
From Peak Oil Barrel, Apr. 22:
The OPEC Monthly Oil Market Report is out with OPEC crude only production numbers for March 2015.

OPEC production was up 812,000 barrels per day. The increase came primarily from three countries:
Saudi Arabia was up 347,000 barrels per day to 10,010,000 bpd.
Saudi Arabia
Iraq was up 319,000 bpd to 3,625,000 barrels per day.


Natural Gas: Futures Traders Dazed, Confused

We continue to bet lower and see about a 1-in-5 chance the futures touch $2.00 before the start of the heating season.
The five-year average inventory gain for the week ended April 17th was 46 billion cubic feet, last year's injections were 45 Bcf. The 5-year average for the week ended Apr. 24th (reported Apr. 30) is a build of 55 Bcf where next weeks report could be 95.


Natural gas futures decline after U.S. storage data
U.S. natural gas prices - on Wednesday, after data showed that U.S. gas inventories rose more than expected last week, sparking fears over a drop in demand for fuel.

On the New York Mercantile Exchange, natural gas for delivery in May hit $2.548 during U.S. morning hours, down 4.9 cents, or 1.86%.

A day earlier, natural gas prices jumped 3.1 cents, or 1.20%, to close at $2.606 amid speculation utilities and power generators will switch from coal to natural gas in wake of the recent slide in prices.

Futures were likely to find support at $2.491 per million British thermal units, the low from April 15, and resistance at $2.625, the high from April 15.

The U.S. Energy Information Administration said that natural gas inventories rose by 90 billion cubic feet in the week ending April 17, the most on record and exceeding expectations for an increase of 88 billion cubic feet....MORE
May futures $2.537 down 6.9 cents:

"Are Value Investing and Momentum Investing Robust Anomalies?"

One of the few examples where Betteridge's Law of Headlines is not operative and the answer is Yes.
From Alpha Architect:

Beating a Dead Horse: Value investing and momentum investing work

At this stage in our lives we’ve essentially memorized the CRSP/Compustat database. Name an anomaly and we can probably tell you the stats on it fairly quickly.
Legitimate anomalies can usually be described via a behavioral finance lens:
  1. Can we identify poor psychology in the market? (Why do prices get dislocated along the way)
  2. Can we identify the limits to arbitrage? (Why don’t large pools of capital arbitrage the anomaly away)
There are 2 anomalies that stand out among all other anomalies: Value investing and momentum investing.
But don’t take our word for it, check out one of my favorite papers on the subject of “anomaly chasing:”
…and the Cross-Section of Expected Returns
You can find the entire laundry list of the papers examined here.

The authors argue that published papers suffer from serious data-mining efforts, and therefore, we need to adjust our statistical inference metrics to account for this fact....MORE

Oppenheimer (Gheit) On Oil & Gas: Q1 A Bloodbath

From ValueWalk:

Q1 2015 A Total Bloodbath For Oil & Gas Sector: Oppenheimer
Oppenheimer says look for a poor first quarter, but that things may start looking up for the O&G sector in the second half of 2015
A new report from Oppenheimer Holdings Inc. (NYSE:OPY) Equity Research pulls no punches in calling for losses from the large majority of the oil & gas exploration and production firms in the first quarter of 2015, but it also suggests that stabilizing oil prices and reduced costs could mean that things are looking up from here.

Oppenheimer analysts Fidel Gheit and Luis Amadeo highlight that first quarter earnings for the oil & gas sector are going to be a bloodbath. “The only good thing about 1Q15 is that it is over as we expect earnings to be at the lowest levels since 1Q09, with 11 of the largest 15 E&P companies we follow likely to report losses. Producers highly leveraged to oil prices, such as HES, MRO and MUR, are expected to report deep losses.”

Overview of the Oil & Gas sector
Major integrated companies are projected to report EPS that is 68% lower YOY and 45% lower sequentially, but no losses.Gheit and Amadeo note Exxon Mobil Corporation (NYSE:XOM) and Shell could see losses from operations in the Americas. In the Oppenheimer coverage universe, BP is anticipated to see the steepest declines followed by CVX because of their high leverage to oil prices. The analysts also project more capex and opex cuts in 2016 even if oil prices do stabilize.

The refiners are likely to be a mixed bag in the first quarter. The report points out that the Brent-WTI differential averaged $5.36/b in the first quarter, relative to  $9.31/b a year ago and $2.98/b in the fourth quarter of 2014, and $5.84/b in 2014, compared with $5.43/b based on the current strip. For the first quarter, MPC is expected to report the highest year over year increase among peers followed by TSO. HFC and PSX are likely to report lower YOY earnings....MORE

Wednesday, April 22, 2015

"Sotheby's 'perfect' 100-carat diamond sells for $22 million"

Following up on "The bull market case for narcissism".
From CNN:
A "perfect" diamond said to be so large that it draws awe-struck people across a room has sold for $22 million at a Sotheby's auction in New York.

The 100-carat, emerald cut, D color, internally flawless diamond is the largest of its clarity and cut to ever be shown at auction. 

"People everywhere have been drawn to it from across the room and they are in awe of its size, particularly when they put it on their hand," said Gary Schuler, the head of Sotheby's jewelery department in New York, before the sale. "They can't believe there's a diamond this pure of such impressive scale."

Only six flawless diamonds over 100 carats have ever been sold at auction, including the one sold on Tuesday, according to Sotheby's. The others include an 118.28 carat oval diamond that sold for $30.6 million at a Sotheby's Hong Kong auction in 2013, a record for a white diamond....MORE
Here's the rock:

Feb. 2015
Carbon Trading: Sotheby’s to Sell 100 Carat ‘Perfect’ Diamond in New York

"The bull market case for narcissism"

From Canada's National Post:
If you’re pretty vain, you’ll probably think this story is about you. But really it’s more about how your vanity is making investors a lot of money these days.

“There is a global bull market in narcissism,” said Ajay Kapur, an equity strategist at Bank of America Merrill Lynch. “Money has been made, and, in our view, a lot more is likely to be made.”
Vanity capital, according to Kapur’s definition, is the “pursuit and accumulation of attributes and accessories that augment self-confidence by enhancing one’s appearance and prestige.”

For instance, luxury watches, jewelry, haute couture and expensive accessories would qualify as vanity capital, but so does buying less expensive products such as cosmetics, smartphones, fitness wear and health supplements.

“You could also resort to ‘augmented’ vanity capital, especially if it is of the expensive sort: luxury property, art, autos, fine wines, Ivy League educations etc.,” he said.
All together, Kapur said global spending on vanity capital is estimated to be approximately US$4.5 trillion, which is larger than the Germany’s GDP.

Stocks that fit the mold, meanwhile, have climbed 20 per cent since 1995 versus just five per cent for global equities as a whole. Based on analyst estimates, world vanity capital earnings are expected to grow 37 per cent in the next two years while MSCI world earnings are expected to grow at less than half that pace....MORE
Making these guys very happy:

Monks on Planes: Buddhist Bling
From the Bangkok Post:
A photo captured from a video clip at YouTube features a group of monks with sunglasses on a private jet. The monks’ behaviour has drawn heavy criticism from online viewers.

Office director Nopparat Benjawattananan said Monday it was not wrong for monks to fly on a private jet, as seen in a recent YouTube video, since the jet did not belong to them, but was donated....MORE
The Louis Vuitton folks couldn't have bought better product placement.
See also:
"Sotheby's 'perfect' 100-carat diamond sells for $22 million"

Back to the Future: "UK’s Renewable Energy Targets Drive Increases in U.S. Wood Pellet Exports"

From the U.S. Energy Information Administration's Today In Energy:
graph of U.S. wood pellet exports by destination, as explained in the article text
Source: U.S. Energy Information Administration, based on U.S. International Trade Commission 
In 2014, almost three-quarters of all U.S. wood pellet exports were delivered to the United Kingdom (UK), mainly for the purpose of generating electricity. Overall, U.S. wood pellet exports increased by nearly 40% between 2013 and 2014, from 3.2 million short tons in to 4.4 million short tons, as the United States continues to be the largest wood pellet exporter in the world.

Canada, formerly the global leader in wood pellet exports, fell behind U.S. exports in 2012. According to the U.S. International Trade Commission, U.S. wood pellet exports accounted for more than $500 million of trade in 2014. Wood pellets can be used for heating homes and businesses and as fuel for small-scale industrial boilers, but in the United Kingdom, Belgium, and the Netherlands, wood pellets are used predominantly for utility-scale electricity generation.

The main driver for growing wood pellet consumption in Europe is the European Commission's 2020 climate and energy plan, which aims to reduce greenhouse gas emissions and increase the contribution of renewables to total energy consumption in the European Union. Individual member states are assigned national renewable energy targets. The United Kingdom in particular is relying on the use of wood pellets in cofiring or dedicated biomass power plants as part of its compliance plan. Cofiring is the simultaneous combustion of two different fuels, while dedicated biomass plants run completely on biomass.

The United Kingdom's plan states that 15% of energy demand must be met by renewable sources by 2020. A renewables obligation credit (ROC) program has caused plant operators of large coal-fired power plants to retrofit existing units to either cofire with wood pellets or convert to dedicated biomass.

Data from the UK Department of Energy and Climate Change indicate that electricity generation from plant-based biomass (which includes wood pellets) increased 47% from 8,933 gigawatthours (GWh) in 2013 to 13,138 GWh in 2014, driven by the continuing conversion of the Drax power plant in north-central England from coal to biomass. In 2014, the Drax plant's wood pellet supply alone accounted for more than 80% of all of the United Kingdom's wood pellet imports from the United States, and almost 60% of all U.S. wood pellet exports to all countries. While the United States is the largest supplier of pellets to the UK, it is not the UK's sole supplier; in 2014, imports of U.S. pellets only met 58% of Drax's demand. Canada provided another 22% of the wood pellet supply. Only 2.8% of Drax's wood pellet supply was domestically produced....MORE
We've looked at the phenomena a few times:

Aug. 2014
"What's Replacing Coal In Europe? Imported Wood"

May 2013
Bonfire of the Subsidies: Europe Returns to Early Stone Age Fuel as Putin Mocks
Mocking Europe's Energy Policy: "Putin invites Europeans to Siberia for firewood"
Jan. 2010
Wood gas vehicles: firewood in the fuel tank

Tool Use Observed In Netherlands Zoo Chimpanzees

Via Kids Prefer Cheese:

Don't drone me, bro.
Here's Arnhem's Burgers Zoo's YouTube channel.

John Deere Tells Patent Office That Purchasers Don't Actually Own the Machine They Paid For (DE)

Implements as a Service is NOT very catchy.

From Wired:

Agriculture Tech
It’s official: John Deere and General Motors want to eviscerate the notion of ownership. Sure, we pay for their vehicles. But we don’t own them. Not according to their corporate lawyers, anyway.

In a particularly spectacular display of corporate delusion, John Deere—the world’s largest agricultural machinery maker —told the Copyright Office that farmers don’t own their tractors. Because computer code snakes through the DNA of modern tractors, farmers receive “an implied license for the life of the vehicle to operate the vehicle.”

It’s John Deere’s tractor, folks. You’re just driving it.

Several manufacturers recently submitted similar comments to the Copyright Office under an inquiry into the Digital Millennium Copyright Act. DMCA is a vast 1998 copyright law that (among other things) governs the blurry line between software and hardware. The Copyright Office, after reading the comments and holding a hearing, will decide in July which high-tech devices we can modify, hack, and repair—and decide whether John Deere’s twisted vision of ownership will become a reality.

Over the last two decades, manufacturers have used the DMCA to argue that consumers do not own the software underpinning the products they buy—things like smartphones, computers, coffeemakers, cars, and, yes, even tractors. So, Old MacDonald has a tractor, but he owns a massive barn ornament, because the manufacturer holds the rights to the programming that makes it run.

(This is an important issue for farmers: a neighbor, Kerry Adams, hasn’t been able to fix an expensive transplanter because he doesn’t have access to the diagnostic software he needs. He’s not alone: many farmers are opting for older, computer-free equipment.)...

"Munich Re forecasts $3B+ cat bond issuance for second quarter 2015"

The cat lives!
From Artemis:
Global reinsurance firm Munich Re, the largest reinsurer in the world, said in its latest catastrophe bond and insurance-linked securities market report that it believes total Q2 2015 cat bond issuance could be “north of $3bn.”
With such a high volume of cat bonds having matured during the first-quarter of 2015 and another $1.5 billion approximately to mature in the second-quarter, Munich Re’s Risk Trading Unit believes that we could see some sponsors catching up on matured issuances in Q2 of this year.

Munich Re notes that while first-quarter issuance reached $1.7 billion by its numbers, which is lower than Artemis’ figure of almost $2.1 billion due to our inclusion of private cat bond deals, maturities outstripped issuance resulting in a shrinking of the outstanding catastrophe bond market....MORE
And the story I was actually going for:
Retail investors to increasingly invest in ILS & reinsurance: KPMG’s Bridgewater

Earth Day Cofounder Killed, Composted, Girlfriend

From NBC News (April, 2011):
Ira Einhorn was on stage hosting the first Earth Day event at the Fairmount Park in Philadelphia on April 22, 1970. Seven years later, police raided his closet and found the "composted" body of his ex-girlfriend inside a trunk. 

A self-proclaimed environmental activist, Einhorn made a name for himself among ecological groups during the 1960s and '70s by taking on the role of a tie-dye-wearing ecological guru and Philadelphia’s head hippie. With his long beard and gap-toothed smile, Einhorn — who nicknamed himself "Unicorn" because his German-Jewish last name translates to "one horn"  —advocated flower power, peace and free love to his fellow students at the University of Pennsylvania. He also claimed to have helped found Earth Day.
But the charismatic spokesman who helped bring awareness to environmental issues and preached against the Vietnam War — and any violence — had a secret dark side. When his girlfriend of five years, Helen "Holly" Maddux, moved to New York and broke up with him, Einhorn threatened that he would throw her left-behind personal belongings onto the street if she didn't come back to pick them up.

And so on Sept. 9, 1977, Maddux went back to the apartment that she and Einhorn had shared in Philadelphia to collect her things, and was never seen again. When Philadelphia police questioned Einhorn about her mysterious disappearance several weeks later, he claimed that she had gone out to the neighborhood co-op to buy some tofu and sprouts and never returned.

It wasn't until 18 months later that investigators searched Einhorn's apartment after one of his neighbors complained that a reddish-brown, foul-smelling liquid was leaking from the ceiling directly below Einhorn's bedroom closet. Inside the closet, police found Maddux's beaten and partially mummified body stuffed into a trunk that had also been packed with Styrofoam, air fresheners and newspapers....MORE 
Here's some green for Earth Day:

Tuesday, April 21, 2015

Borrow In Dollars, Pay In Tears

We've said ad nauseum*:
It is very dangerous to borrow in a currency other than the one in which you earn your income.
From Bloomberg:
Major Chinese Developer Says It Can’t Pay Dollar Debts
Kaisa Group Holdings Ltd. became China’s first real estate company to default on its U.S. currency debt, capping a month of distress in bond markets amid an anti-corruption probe and fueling concern that losses will spread.

The default coincides with the expiration of a 30-day grace period on $52 million of missed interest payments on two dollar-denominated bonds, according to a Hong Kong stock exchange statement Monday. Kaisa, based in the southern city of Shenzhen, is struggling to service 65 billion yuan ($10.5 billion) of debt owed to both onshore and offshore lenders while becoming embroiled in President Xi Jinping’s crackdown on graft....MORE

If lenders don't trust you in your own currency they sure won't accommodate your FX flings.
*Evans-Pritchard: "Dollar surge endangers global debt edifice, warns BIS"
"The Swiss franc appreciation and the sorry saga of FX lending"
'Russian ruble's fall: A classic 'currency collapse'" and Why It's Such a Big Deal
Remember When the BIS Was Warning That A Strong Dollar Would Wreck Everything?

"Market Wrap: Oil Sells Off As Saudis End Military Operations In Yemen; Gold Ticks Higher"

Oil has become a slave to the dollar.
From Hard Assets Investor:
Oil was the only notable mover today; other commodities were narrowly mixed.

Gold and silver edged marginally higher, while crude oil pulled back in a mixed session for commodities. At the same time, stock markets fell slightly as traders digested the latest corporate earnings releases.
According to Bloomberg, 84 percent of S&P 500 companies that have reported earnings thus far have beaten analyst estimates, while 51 percent have topped revenue estimates. Still, earnings on the whole are anticipated to drop 4.3 percent year-over-year in the quarter due to the sharp decline in oil prices from last year.

Elsewhere, news flow was light; no notable economic data was released.

Taking a look at currency markets, the U.S. Dollar Index was last trading unchanged at 97.96. In bond markets, the U.S. 10-year yield rose by 2 basis points to 1.91 percent.
  • Gold remained close to the magnetic $1,200 level today. The yellow metal rose by $5.47, or 0.46 percent, to $1,201.35, while silver rose by $0.03, or 0.16 percent, to $16.

    Platinum lost $0.40, or 0.03 percent, to $1,148.65 and palladium dipped by $2.15, or 0.28 percent, to $772.70.

    "We're looking at currency and bonds today. We saw the dollar index start off really strong, and now has backed off and turned [flat]," said Phillip Streible, senior commodities broker at RJO Futures.
  • Crude oil retreated from the highest levels of the year ahead of the release of the weekly inventory data from the EIA on Wednesday. Brent was last trading down by $1.20, or 1.89 percent, to $62.25, while WTI lost $1.12, or 1.99 percent, to $55.26.

    Saudi Arabia announced the end of military operations in Yemen, easing geopolitical concerns.

    "I don't think anybody expected the military operation to end so quickly," said Phil Flynn, analyst at the Price Futures Group. "It definitely accelerated the selling [in oil]."
  • Natural gas climbed $0.04, or 1.46 percent, to $2.57/mmbtu.

    "The going to just [play] around between $2.48 and $2.69," said Frank Clements, co-owner of Meridian Energy Brokers Inc. "Longer-term, the whole thing is pointing lower, but, shorter-term, it just isn't ready to go there."

NiemanLab On The Wall Street Journal's Web Redesign

From the Nieman Journalism Laboratory:

After the launch of its long-awaited web redesign, The Wall Street Journal hopes to spur innovation

Edward Roussel said it wouldn’t be an exaggeration to call this past year “the busiest 12-month period in The Wall Street Journal’s history” as the Journal has built out WSJD, redesigned fresh responsive article and video pages, and released new iPad and Android apps. That continues this week with the long awaited redesign of The Wall Street Journal’s website, its first since 2008, which launched today, and the release on Friday of the Journal’s app on the Apple Watch. 

But beyond new apps and redesigned websites, the Journal is integrating its product team into the newsroom and Dow Jones, the Journal’s parent, has created an innovation group, led by Roussel, who now has the title of Dow Jones’ chief innovation officer. “Until a year or so ago, the cadence wasn’t swift enough, and that’s what we’re seeking to put right,” he said. Processes that took months last year when the Journal was creating the first responsive part of its site, WSJD, now take weeks to accomplish, he said....MORE

Tidbits From the FT Commodities Summit

Via FT Alphaville:
Some highlights from the FT Commodities Summit, which is taking place in Lausanne, Switzerland this Tuesday and Wednesday.

Oil production is becoming more of a manufacturing activity
On the oil price slump, Noble CEO Yusuf Alireza said “the traditional [Exploration & Production] player has a very high capex and low opex so the marginal cost of the barrel is very low, and when you have that kind of dynamic you have a very steep supply curve, whereas shale is much more of a manufacturing activity.”
He added: “You have to force the oil out of the ground. Which means, you have more opex, the higher cost of opex, which means you have a player in the market that really is a swing producer, which can react to effectively higher prices, to lower prices.

The marginal cost of that barrel is higher. There is a reason why Saudi Arabia made that decision, they realised that changes in their supply would not impact prices just market share.”

Nobody predicted the depth of the oil price slump
Jeremy Weir, CEO of Trafigura said: “At this conference last year if you asked everyone where would the oil price be in 12 months time I think, potentially, more than 50 per cent may have got it right in terms of price direction, but in terms of extreme price move, everyone would have been wrong....MUCH MORE
Commodities: So Gunvor, Noble, Trafigura and Mercuria Walk Into A Bar...

"EUR/USD Mid-Day Outlook"

We're still betting lower although on the shorter term charts a series of higher lows may be emerging.
107.63 last.

From Action Forex:
Intraday bias in EUR/USD stays neutral for the moment. Consolidation pattern from 1.0461 is still in progress and stronger recovery cannot be ruled out. But near term outlook stays bearish as long as 1.1096 support turned resistance holds and downside breakout is expected. Below 1.0461 will extend larger down trend to next fibonacci level at 1.0283....MORE
 EUR/USD 4 Hours Chart

"China’s Grand Plan for Pakistan’s Infrastructure"

This is really a big deal, links below.
From The Diplomat:

President Xi Jinping has inked a deal with Islamabad that could provide Beijing with direct access to the Indian Ocean.
China’s President Xi Jinping came to Pakistan bearing serious cash this week, pledging to invest $46 billion in their neighbor’s fragile infrastructure on Monday. Much of that money will go toward the China-Pakistan Economic Corridor (CPEC). It’s a mix of roads, rails, and pipelines that will connect Beijing’s infrastructure at Gwadar Port in Balochistan, just off the southern tip of the Persian Gulf, with Xinjiang province on China’s western frontier, some 3,000 kilometers away. That will do much to enrich a relationship that Pakistan’s Prime Minister Nawaz Sharif once described as “sweeter than honey.” It also gives China a direct route by land to the Indian Ocean basin, the site of 70 percent of the world’s oil traffic.

China’s Grand Plan for Pakistan’s InfrastructureIf enacted, that plan would enable China’s naval vessels and merchants to bypass the Malacca Strait, long a haven for pirates and militants who prey on unsuspecting ships. The CPEC would allow the government and banks in the mainland to lend to Chinese companies operating in Pakistan, facilitating construction along the route. Some of the other line items in the deal aim to fix Pakistan’s failing energy infrastructure: the CPEC calls for $15.5 billion in investments ranging from coal to solar and hydroelectric power, scheduled to become part of Pakistan’s national electricity mix in 2017. That will follow a fiber optic cable linking Xinjiang and Rawalpindi, which will come at the cost of $44 million.

China has plenty of incentive to unleash a spigot of investment, despite fears that Pakistani radicals are stoking violence in Xinjiang among the 10 million Uyghur Muslims that live there. Beijing has already pushed heavily for other projects in the region, including the 1,240 km Karachi-Lahore motorway, a six-lane, high speed corridor expected to be completed in the fall of 2017, and orchestrating upgrades to public transportation, including metro and bus service, in six cities, including Lahore, Karachi, and Rawalpindi.

Modernizing the Karakoram highway, which runs 1,300 km from Kashgar, the ancient silk road crossing in Xinjiang, all the way into the heart of the Punjab, Pakistan’s biggest province, will also prove critical.
All of that leads to Gwadar, which China hopes to transform into a free-trade zone on the order of a Singapore or a Hong Kong, another major focus for Chinese investors. That carries geopolitical weight. China’s aid to Pakistan now exceeds American spending, which has totaled $31 billion since 2002. Washington’s investments have slowed since counterterrorism funding authorized by Congress during the Afghan surge has dried up....MORE
One quick note: I can't imagine the Chinese navy is all that concerned with pirates, outlaws have usually come out the worse for wear when confronting navies.
China Bets Big On Pakistan

And five years ago:
Shadow War: We Told You the Indian Ocean Would Be Hot
In our November 2010 post "India Orders Firms to "Scour the Earth" for Energy Supplies as President Obama Heads Over" I mentioned:
I have a hunch that American schoolkids today will be hearing a lot about the Indian Ocean before they graduate and might even be able to find it on a map.*...
...*I mean come on, just look at the land masses that border it:
Map of Indian Ocean
Here's the latest, from Wired's Danger Room blog...
See also:
Indian Ocean Geopolitics: China Goes to the Maldives
"Is China Moving to Control the Indian Ocean?" 

"Is Wall Street Robbing Pensions Blind?"

From Pension Pulse:
Dan Davies, a senior research adviser at Frontline Analysts, wrote a comment for The New Yorker, Is Wall Street Really Robbing New York City’s Pension Funds?:
Most any fee, even a fraction of one per cent, will come to look big if it’s multiplied by tens of billions of dollars. So when New York City Comptroller Scott Stringer wanted to make a point recently about the fees the city’s public-sector pension system had paid to asset managers between 2004 and 2014, he didn’t have to work very hard to find an outrageous number. Over the past ten years, New York City public employees have paid out two billion dollars in fees to managers of their “public market investments”—that is, their securities, mainly stocks and bonds. Gawker captured the implication as well as any media outlet with its headline: “Oh My God Wall Street Is Robbing Us Blind And We Are Letting Them

Stringer’s office was barely more restrained, sending out a press release that called the fees “shocking.” The comptroller also issued an analysis that spelled out the impact of fees on the investment returns of the five pension funds at issue: those of New York’s police and fire departments, city employees, teachers, and the Board of Education. Though the comptroller didn’t specify which firms had managed the funds, they were likely a familiar collection of financial-industry villains. “Heads or tails, Wall Street wins,” Stringer said.

The rhetoric tended to brush past the fact that the pension funds didn’t actually lose money. In the analysis, their performance was being measured relative to their benchmarks, essentially asking, for every different class of asset, whether the funds performed better or worse than a corresponding index fund would have. For reasons unclear, the city’s pension funds have been recording their performance without subtracting the fees paid to managers, but the math shows that New York City’s fund managers outperformed their benchmarks by $2.063 billion across the ten-year period under review, and charged $2.023 billion in management fees.

Compared with the average public pension fund’s experience on Wall Street, this is actually, frighteningly, pretty decent. All too often, when researchers investigate pension-fund performance, they find that management fees have eaten up more than any outperformance the managers have generated. A study published in 2013 by the Maryland Public Policy Institute concluded that the forty-six state funds it had surveyed could save a collective six billion dollars in fees each year by simply indexing their portfolios.

I covered the institutional-fund-management industry as an analyst for ten years, and was never given specific information on the pricing of individual deals, but I would estimate, based on the growth of the funds from 2004 to 2014, the variance in the market (especially the crash of 2008), and the total fees, that New York City paid, on average, about 0.2 per cent, or what a fund manager would call “twenty basis points.” You would expect the trustees of such a large portfolio to strike deals on fees, and indeed twenty basis points is much lower than the average paid to managers of most actively managed mutual funds (between seventy-four and eighty basis points, according to the Investment Companies Institute). It is still far more, though, than the five basis points charged by the Vanguard index tracker fund to large institutional investors....MUCH MORE
The New Yorker story was also highlighted by Alphaville's Further Reading linkmania post.

Real Estate: Ziff Family Florida Compound Lists For $200 Million

From Curbed Miami:

The Iconic Manalapan Estate of Gloria Guinness, One of Truman Capote's 'Swans', Lists for Almost $200 Million
A massive estate in Manalapan known as Gemini is being put on the market for "almost $200 million" by the Ziff publishing family, reports the Wall Street Journal. It is now the most expensive residential listing in Florida, and one of the top in the country. Gemini is not just any old marginally historic house with a blockbuster price tag meant to catch headlines, however. It was the home, well... of a 'Swan.'

Built in the 1940s, Gemini was the Palm Beach home of Gloria Guinness, a twentieth century style icon and one of Truman Capote's famous 'Swans.' It played host to the most glamorous people of its day, including Capote of course. The Duke and Duchess of Windsor were also houseguests. The Windsors' pug, Minoru, died during a visit here, with all of Palm Beach "plunging into mourning."

Today, Gemini is a 16-acre compound spanning the barrier island from the Atlantic Ocean to Lake Worth, with its own 1,200 foot long beach, two practice golfing greens, a miniature golf course with a model train set running through it, a sports complex, an elaborate treehouse, and a 62,200 square foot main house. Various outbuildings and guest cottages, along with space for staff quarters including a manager, together create a compound designed "to host a lot of friends and family there at the same time." says a representative of the listing brokerage....MORE
And via the Wall Street Journal story:
 In addition to the main house, there is a seven-bedroom house known as the Mango House, two four-bedroom cottages on the beach, a manager’s house with four apartments, and manager’s offices.

Commodities: So Gunvor, Noble, Trafigura and Mercuria Walk Into A Bar...

From FT Alphaville:

Dispatches from the 2015 FT Commodities Summit
FT Alphaville is in Lausanne, Switzerland, for this year’s Commodities Summit. The conference is taking place at the Beau Rivage — a hotel so good that John Oliver has even expressed a desire to have intimate relations with it — and the opening keynote from Ning Gaoning, chairman of China National Cereals, Oils and Foodstuffs Corporation (COFCO) is about to begin....
...later this morning — the panel everyone is waiting for — FT editor Lionel Barber interviewing Yusuf Alireza, CEO of Noble, Marco Dunand, CEO of Mercuria, Claude Ehlinger, deputy chief executive of Louis Dreyfus Commodities, Torbjorn Tornqvist, CEO of Gunvor and Jeremy Weir, CEO of Trafigura....MORE
And for the tweetstream:

FT Commodities Summit: US oil independence to bust dollar-pegs

Just wow.

Monday, April 20, 2015

"Etsy’s Stock Is A Découpage of Market Schadenfreude" (ETSY)

What he said.

From DealBreaker:
Turns out that Etsy’s first day of trading might have been as cuckoo bananas as it actually looked.
After soaring to Icarian (if Icarus had made his wings out of hemp and spirit glue) values on Thursday, during which it peaked at $35.74 a share, Etsy stock is now unraveling like a spool of ethically-farmed yarn… in the hands of Wiccans… sharing a drafty farm house....MORE
It appears Bess is training a new team in the DealBreaker style.*

Signposts: "Etsy’s Surging IPO Shows Losing Your Indie Cred Pays Off"

The IPO priced at $16 on Thursday so despite today's whack the stock is still up over 55%.
Not that I'd pay that much but it is what it is.

*I wonder whatever happened to that Matt Levine fellow, I liked his footnotes.

China Bets Big On Pakistan

From The American Interest:
Chinese President Xi Jinping landed in Islamabad today for two days of consultations with his Pakistani counterparts. Massive infrastructure projects are on the agenda, including coal and renewable energy plants, as well as a large highway project that will include pipelines and fiber optic cables leading to the port of Gwadar in Baluchistan. Islamabad is also looking to secure the purchase of up to eight Chinese submarines during Xi’s visit. If the sub deal is finalized, observers are not counting on it to be publicized during Xi’s visit.

Indian policymakers are no doubt watching the visit closely. Beyond the submarines, the development of Gwadar could give the Chinese navy an important foothold in the region. Last week, China secured a 40-year lease to operate the Gwadar port itself, which has been in development for years and could be completed as early as this year.Pakistani officials have suggested the project could hit $46 billion, but at least one source has pegged the looming deal at $28 billion. In either case, the investment dwarfs the previous U.S. investment project in Pakistan, which totaled $7.5 billion in 2009 and is considered a “massive failure” by some analysts. The United States has contributed $31 billion in aid to Pakistan since 2002, but most of it has gone to bolstering security services....MORE
From the Pakistan Herald:
Pakistan and China sign agreements for 8030 MW 14 power projects

And from the Daily Times (PK):
Chinese delegation assures to invest $3.5bn in Thar coal project

Climateer Line Of the Day: Blackstone Comments On the Oil Patch Edition

From Wolf Street:

The Chilling Thing Blackstone Said about the Oil Bust 
Regardless of how troubled oil and gas companies are, “if the assets are good, someone will own them,” explained David Foley, senior managing director of Blackstone Energy Partners.

He expected companies to buckle under the load of junk debt and kick off a long series of bankruptcies and assets sales at rock-bottom prices. The question was when.
That was in February. Private equity firms – the “smart money” – have been out in force for months, raising tens of billions of dollars, with the promise to their investors that they would pick up assets of all kinds on the cheap. They’ve been circling like vultures, waiting to swoop down and pick the best morsels off the carcasses soon to be strewn about the oil patch.

“The timing of having that capital available now really couldn’t be better,” Blackstone CEO Steve Schwarzman said at the time. He expected that it would take one-and-a-half years before oil and gas companies would be completely drained of cash and would get into serious trouble. But some of the service companies could run out of money and topple “very, very quickly,” he said. Over the next couple of years, there would be “all kinds of shakeouts.”

PE firms expected valuations to plunge much further as assets would hit the auction block. And so Blackstone president Tony James said that his people were “scrambling” to invest over $10 billion. They were all singing from the same page.

And PE firms continued raising money for their energy funds. A week ago, EnCap Investments in Houston closed its Energy Capital Fund X after having raised $6.5 billion. It had been “significantly oversubscribed,” the firm said; investors are clamoring for this sort of bottom-picking action by the smart money.

Blackstone, Carlyle Group, Apollo, and KKR together have raised about $30 billion for energy investments, according to Bloomberg. Walburg Pincus, Riverstone, and many others – they all have been raising billions of dollars each. The piles in dry powder grow by the day.

This is the “smart money.” The oil bust had wiped tens of billions of dollars from their energy portfolios, including KKR’s disastrous investment in Samson Resources. Someday, they’re going to get this right.
That’s the idea.

Then something unexpected happened. Other investors were despairing with negative yields in Europe and ludicrously low yields in the US, and they saw stock markets at precarious heights, and nothing looked appetizing. And maybe they wondered, “What the Fed is going on?” as Ryan Litfin wrote in Money from Heaven, Path to Hell.

But these investors saw one sector where risk had – very painfully – reentered the price calculus: energy. So they held their nose and began scooping up beaten-down energy stocks and junk bonds, and prices perked up. Seeing this, companies began to issue new junk bonds and even new equity, thus funding their permanently cash-flow negative operations for a while longer. Investors gobbled it all up. The whole sector began to levitate.

“These stocks are pricing oil for $75 to $80 a barrel – something I believe the market won’t see at least until the 2nd quarter of next year at the earliest,” wrote Dan Dicker, an oil-trader veteran, on Friday in Oil & Energy Insider: And he added....MORE
And the pull quote?
Oil producers have been able to “raise a lot of debt and, in some cases, equity publicly at values that we wouldn’t touch,”
-Tony James, President, CEO, Blackstone

"Should economists rule?"

Professor Wren-Lewis throws a turd in the punchbowl that was a beautiful morning.
From Mainly Macro:
Tim Harford in the FT talks to seven random mainstream economists about their radical ideas for economic policy. (Podcast, not pay walled, here.) Nick Stern wants green cities (with much greater economic autonomy), Jonathan Haskel wants more spent on research (because the returns are very high), Gemma Tetlow wants to merge income tax with national insurance, Diane Coyle wants to reduce boardroom pay, John van Reenen wants new institutions to promote infrastructure, Kate Barker wants changes to how housing is taxed, including capital gains on main residences, and Simon Wren-Lewis wants ‘democratic helicopter money’.

You can find more details about democratic helicopter money here. The democratic bit is that the central bank gives the created money to the government on condition that it is used for a stimulus package, but the form of the stimulus package would be the government’s choosing. I was impressed that Tim managed to turn a very pleasant chat over coffee (while taking few notes) into a coherent account of my argument. The only point I might have added is that my suggestion of turning helicopter money democratic is in part to avoid some of the political difficulties he alluded to.

The common strand in many of these suggestions, which Tim draws out, is a desire to replace direct political control by something more technocratic. Now you could say that this is simply a power grab by economists. However if you think about the examples here, they represent important and widely recognised policy mistakes which tend to be universal and persistent: failure to deal with climate change, failure to invest enough in R&D, unnecessary complications in the tax system, runaway boardroom pay, failure to invest in infrastructure even when borrowing is ultra cheap, a broken housing sector and procyclical fiscal policy. It is not as if the status quo is doing just fine.

I would add just two observations. First, the argument is often not about ‘losing democratic control’, but instead about advice being open and transparent. The alternative to some advisory body, whose deliberations should be publicly available and subject to scrutiny, is often secret advice from the civil service, or worse still from policy entrepreneurs....MORE