The Aftermath Of The Great 2014 Oil Crash “A Textbook Macroeconomic Shock”

Not a day passes without pundits on either side of the debate, eager to make their case that the acute, nearly 50% plunge in the price of crude, swear up and down their preferred economic ideology of choice that said plunge is [bullish|bearish] for the economy. The reality is that the true impact of the great oil crash of 2014 will not be revealed for at least several months, however for those who can’t afford to wait, or simply lack the patience, here is perhaps the most comprehensive view of the pros and cons of what has now been dubbed a “textbook macroeconomic shock” by Deutsche Bank.

From Deutsche Bank’s 2015 Credit Outlook titled “Plate Spinning”

The Great 2014 Oil Shock – Aftermath

The fall in the price of oil – down more than 40% since June – is a textbook macroeconomic “shock”. Stripping it down to its most fundamental level, a fall in the price of oil predistributes real income from oil producers to oil consumers. Money oil consumers would have exchanged with oil producers for the stuff, can instead be put towards other purchases or savings. At the global level it means less spent on oil imports for oil importing nations and less income from oil exports for oil exporting nations. To put some rough numbers around this, US average net imports of oil and the like has averaged 5.2m barrels per day in 2014, thus the fall in the oil price by $43 since late June is saving the US economy about $224m a day on its net oil transactions and costing its oil trade partners the same amount. This is after accounting for the dramatic fall in US net oil imports driven in part by the country’s shale boom.

Therefore if oil prices stay where they currently are this appears to be a meaningful headwind for the big oil consuming nations. The biggest net oil importers in 2013 were (1) the US, (2) China, (3) Japan and (4) India. Major exporters will suffer. Probably the most prominent current example of an economy that will struggle to cope with the fall in the oil price is Russia, which in 2013 was the world’s second largest net exporter of oil. As we’ve already discussed, estimates suggest that at oil prices below $90 the Russian economy will go into recession and DB estimates the government will fail to balance its budget at $100 (Figure 133). At current levels none of the major oil exporters will be able to balance their budgets next year.

Overall, most estimates suggest that a fall in the oil price is a net positive for the total world economy. According to the IMF’s Tom Helbling, “a 10% change in the oil price is associated with around a 0.2% change in global GDP” (The Economist) as oil consumers are greater spend-thrifts than oil producers. Given those estimates the current fall of more than 40% should add about +0.8% to global GDP growth.

With so much of the global growth story resting on US shoulders next year the fall in the price of oil should help, although not as much as it used to given the USA’s shale boom. The EU should also gain given its $500bn of energy imports in 2013. However the drop in the price of oil might prove a mixed blessing given that sharp drops in the oil price will weigh on inflation (Figure 134) and another negative headwind to inflation (in any form) is not something the euro area really needs or wants currently with CPI running at just +0.4% YoY. On the other hand the drop in inflation pressures should be a boon for a number of EM economies whose central banks may otherwise have had to hike rates in the face of rising inflation even as their growth rates remained tepid.

It’s also important to remember that whilst oil is an important global commodity it is rare for it alone to drive global economic outcomes. The halving of global oil prices in 2008 didn’t prevent many of the world’s oil importing economies from suffering severe recessions and as Figure 135 shows there is no easy nor automatic relationship between falling oil prices and rising US growth. The environment within which the oil price change occurs is important. Indeed if the current drop in the price of oil is being driven by expectations of falling demand driven by expectations of a slowdown in global growth it’s possible that the drop in the oil price is at best going to partially cushion the global economy from a slowdown rather then drive it to higher growth rates.

Also importantly for investors, falling oil prices will not affect all areas of economies equally, even in those economies that should benefit at an aggregate level. As our US credit strategy team wrote recently, energy companies make up the largest single sector component of the US HY market at 16% (US HY DM Index) and so the falling oil price may prove a negative for the US HY credit market. Our US team added that if the WTI price fell to $60/bbl this would push the whole US HY energy sector into distress, with around 1/3rd of US energy Bs/CCCs forced to restructure, implying a 15% default rate for overall US HY energy which would contribute 2.5% to the broad US HY default rate. This could be a sizeable enough shock to cause concern throughout the rest of the US HY market.

There is no doubt that the fall in the price of oil in 2014 has been a significant economic shock. Most estimates suggest that this should add to global growth, weigh on global inflation and most likely have varied but oil-specific asset price implications (EM oil producing nations and US HY weakness stand out); however it is likely that growth tailwinds from this year’s fall in oil prices will not be the main story for investors in 2015.


Russia Warns May Send Troops To Ukraine After Congress Unanimously Votes To Give Lethal Aid To Kiev

While the market, and America’s media, was focusing over the passage of the Cromnibus, and whether Wall Street would dump a few hundred trillion in derivatives on the laps of US taxpayers once again (it did), quietly and unanimously both houses passed The Ukraine Freedom Support Act of 2014, which authorizes “providing lethal assistance to Ukraine’s military” as well as sweeping sanctions on Russia’s energy sector.

The measure mandates sanctions against Rosoboronexport, the state agency that promotes Russia’s defense exports and arms trade. It also would require sanctions on OAO Gazprom (GAZP), the world’s largest extractor of natural gas, if the state-controlled company withholds supplies to other European nations (yes, the US is now in the pre-emptive punishment business, and is enforcing sanctions on a “what if” basis).

But while one may debate if additional sanctions will do much to impact a Russian economy which is already impaired due to the plunging ruble, the clear escalation is that unlike previously, when the US limited itself – at least on paper – to non-lethal assistance to the Ukraine, now the US is finally preparing to send in weapons, and potentially “military advisors” as well. We say “on paper”, because in late November hacked US documents revealed the extent of secret US “Lethal Aid” for the Ukraine army. And since America’s under-the-table support for Ukraine’s insolvent armed forces has been revealed, there is little point in pretending to keep a moral upper hand (especially in light of recent “other” revelations involving the US, most notably its intelligence services).

And as has happened for the entire duration of the second Cold War, any action by the US was promptly met with a just as provocative reaction by Russia. In this case, a leftist member of the Russian Duma said the US Senate’s decision to arm the Kiev regime should prompt ‘adequate measures’ from Russia, such as deploying military force on Ukrainian territory before the threat becomes too high.

In other words, in addition to the global energy meltdown which is about to send oil exporting nations into a state of shock matched only by owners of US High Yield energy bonds, the Ukraine conflict, which the algos and carbon-based Portfolio Manager forgot about, is about to re-escalate, with Russia now set to recreate the Crimea annexation after it officially sends its troops on Ukraine soil.

From RT:

“The decision of the US Senate is extremely dangerous. If it is supported by the House of Representatives and signed by their president, Russia must reply with adequate measures,” Mikhail Yemelyanov of the Fair Russia party told reporters on Friday.

Mad Max: Fury Road

Mad Max: Fury Road – Official Theatrical Teaser Trailer

From director George Miller, originator of the post-apocalyptic genre and mastermind behind the legendary “Mad Max” franchise, comes “Mad Max: Fury Road,” a return to the world of the Road Warrior, Max Rockatansky.

Haunted by his turbulent past, Mad Max believes the best way to survive is to wander alone. Nevertheless, he becomes swept up with a group fleeing across the Wasteland in a War Rig driven by an elite Imperator, Furiosa. They are escaping a Citadel tyrannized by the Immortan Joe, from whom something irreplaceable has been taken. Enraged, the Warlord marshals all his gangs and pursues the rebels ruthlessly in the high-octane Road War that follows.

Tom Hardy (“The Dark Knight Rises”) stars in the title role in “Mad Max: Fury Road”—the fourth in the franchise’s history. Oscar winner Charlize Theron (“Monster,” “Prometheus”) stars as the Imperator, Furiosa. The film also stars Nicholas Hoult (“X-Men: Days of Future Past”) as Nux; Hugh Keays-Byrne (“Mad Max,” “Sleeping Beauty”) as Immortan Joe; and Nathan Jones (“Conan the Barbarian”) as Rictus Erectus. Collectively known as The Wives, Zoë Kravitz (“Divergent”) plays Toast, Riley Keough (“Magic Mike”) is Capable, Rosie Huntington-Whiteley (“Transformers: Dark of the Moon”) is Splendid, and supermodel Abbey Lee is The Dag, and Courtney Eaton is Fragile. Also featured in the movie are Josh Helman as Slit, Jennifer Hagan as Miss Giddy, and singer/songwriter/performer iOTA as Coma-Doof Warrior.

The cast is rounded out by well-known Australian actors John Howard and Richard Carter, supermodel Megan Gale, Angus Sampson, Joy Smithers, Gillian Jones, Melissa Jaffer and Melita Jurisic.

Oscar-winning filmmaker George Miller (“Happy Feet”) is directing the film from a screenplay he wrote with Brendan McCarthy and Nico Lathouris. Miller is also producing the film, along with longtime producing partner, Oscar nominee Doug Mitchell (“Babe”, “Happy Feet”), and P.J. Voeten. Iain Smith, Graham Burke and Bruce Berman serve as executive producers.

The behind-the-scenes creative team includes Oscar-winning director of photography John Seale (“The English Patient”), production designer Colin Gibson (“Babe”), editor Margaret Sixel (“Happy Feet”), Oscar-winning costume designer Jenny Beavan (“A Room with a View”), action unit director and stunt coordinator Guy Norris (“Australia”), and makeup designer Lesley Vanderwalt (“Knowing”).

Warner Bros. Pictures presents, in association with Village Roadshow Pictures, a Kennedy Miller Mitchell production, a George Miller film, “Mad Max: Fury Road.” The film is scheduled for release on May 15, 2015, and will be distributed by Warner Bros. Pictures, a Warner Bros. Entertainment Company, and in select territories by Village Roadshow Pictures.


Taxation: VAT is a poll tax on living. To increase it is to hit the poorest | the big issue

Switching taxation from VAT and on to the incomes of the super-rich would increase spending on goods and services

Will Hutton is right (“Forget austerity – what we need is a stronger state and more taxation”, Comment). But do we really need to “broaden the VAT base”? VAT is effectively a tax on the level of economic activity in a way that taxing rentier incomes is not.

Switching taxation from VAT and on to the incomes of the super-rich would increase spending on reproducible goods and services and away from spending on non-reproducible assets – the latter surely a good thing, given the state of the London property market.

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The deficit isn’t the real problem. The crisis is in productivity

However much the media has swallowed George Osborne’s line on the deficit, Britain is not broke. The malaise lies elsewhere

When British governments are in trouble, their first line of defence is to attack the BBC – an institution valued all over the world, but not always in Westminster. Having had what he plainly regarded as a successful day delivering his autumn statement the other week, George Osborne sounded as though he had woken up with a hangover when he lost his cool on the Today programme and complained bitterly about the BBC’s coverage.

I found it pretty strange at the time, and still do. The BBC and the media generally have cravenly swallowed the chancellor’s line that the most important issue facing the nation is The Deficit. I have lost count of the number of references to this residual economic statistic that for decades hardly rated a mention in the press.

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