Category Archives: Russia

Re: Roubini

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(email exchange)

>   
>   On Tue, Jan 13 at 5:48, Morris wrote:
>   
>   He believes most market participants correctly expect the first half of ’09 to be
>   weak but he thinks most expect a second half recovery which says won’t
>   happen.
>   

Depends on the fiscal package. He could be right.

>   
>   To him the FED is pushing on a string.
>   

He doesn’t realize it’s always pushing on strings.

>   
>   When he first suggested that financial losses would be $1 trillion and then
>   inched up to $2 trillion no one agreed with his analysis; at this point it looks
>   like the actual number for ’08 will be north of $3 trillion.
>   

Only because of a total failure of government. I thought they’d do a Q3 fiscal package.

>   
>   He maintains the banking system is insolvent
>   

Always is on the way down. As soon as things turn up it isn’t anymore.

>   
>   And the credit crunch remains severe. The government will have to contribute >   another $1 trillion to the banking system to enable lending.
>   

No, delinquencies will have to fall and systemic creditworthiness to enable lending.

>   
>   His estimate is that the recession will end in Dec ’09 but in 2010 growth will be
>   a disappointing 1-1 1/2% so the recovery will be very tepid and not help
>   valuations. At present he sees 60% of global GDP contracting and he looks for
>   earnings disappointments out of capital goods and technology companies due
>   to muted spending.
>   

Agreed.

>   
>   China GDP will grow at best 5% in ’09 which is the equivalent of a hard landing
>   and may be worse. Russia will decline 2-3% in ’09. Commodity prices might
>   decline an additional 15-20% and we face deflation pressures.
>   

Not with a real, trillion plus fiscal package.

>   
>   The governments response is aggressive but the markets are overestimating
>   their effectiveness.
>   

Don’t agree. They will be very effective if they are large enough.

>   
>   This is a solvency not just a liquidity crisis.
>   

Usually is only a solvency crisis.

>   
>   His three main points are: 1) We are facing an ugly synchronized global
>   contraction. 2) Forecast of all firms EPS growth is “delusional”. For ’09 the S&P
>   will at best be $60 and could be $50 with a P/E in the range of 10-12X.
>   

Very possible without the right fiscal package.

>   
>   The effect of those projections would result in the market declining 20-25% in
>   the mildest case and up to 30-40% in his “worst case scenario”. 3)There
>   remains room for financial shocks. We no longer face a total financial systemic
>   shock but it could take another 2-3 years of increased individual household
>   savings to repair balance sheets before consumption can grow.
>   

Will take far less than that with the right fiscal package. Government deficit = non government savings

>   
>   Unemployment can hit 9 1/2% by mid 2010.
>   

Maybe, it’s a lagging indicator.

>   
>   We have too many zombie institutions and the government has to permit
>   more to fail…he did not name any.
>   

There aren’t many he could name.

>   
>   Real estate liquidations cost US financial institutions 20 cents on the dollar so
>   he prefers government loan modifications as being more efficient and a
>   cheaper alternative.
>   

I prefer a payroll tax holiday, which should have happened in September, to restore the ability to make mortgage payments.

>   
>   There remains no asset class in which to hide. These are globally synchronized
>   problems. He is long term bearish the dollar which needs to decline to help
>   the export sector.
>   

It might decline but doesn’t have to for the purpose of helping exports.

From his previous writings he’s way out of paradigm but has been right for many of the wrong reasons.


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Re: Mike Masters on oil on CBS

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>   
>   On Mon, Jan 12, 2009 at 11:49 AM, Russell
>   wrote:
>   
>   Very compelling argument. Still believe it is the
>   Saudis controlling price?
>   

Has to be, within a range of net demand.

Notice their ‘production increase’ right before the big sell off in July?

>   
>   Makes sense: I remember the Kuwait oil
>   minister saying that he could not explain $140
>   oil. He was not seeing any new demand to
>   drive up price. Everyone said he was lying.
>   
>   A friend was telling me that there was no
>   shortage. In March he was trying to find
>   storage along the Mississippi River. There was
>   no. All tanks full.
>   

Right, never has been a shortage. Just price setting. And the price setters were happy to accommodate the run up until it cut demand, as they were running out of capacity as well.

>   
>   So today we have global demand declining 1
>   million barrels per day.
>   

Right, no big deal. Nothing OPEC hasn’t already adjusted for.

The problem has been the inventory liquidation as prices fell. No telling when that has run it’s course. Futures markets are saying not yet, but getting closer to the end.

The Masters Inventory Liquidation is probably the largest inventory liquidation of all time.

Hopefully it leads to pension funds not being allowed to use passive commodity strategies as investments, but not sure it won’t all come back. There’s still a lot of it going on. I’d vote to have it outlawed.

>   
>   Supply is being cut back. We have the Chinese
>   economy tanking. So are we looking at $25 oil?
>   

Not impossible until the inventory liquidation has run its course. It took about this long in 2006. I didn’t think it would last that long this time, but the liquidation has been a lot larger than back then.

>   
>   If so, we are going to see a violent world at a
>   time of global economic weakness. Russian is
>   struggling, so is Venezuela and Iran. Potential
>   uprisings there.
>   

Yes.

>   
>   Here is the USA it is a true blessing. Without
>   lower oil prices, we would be a serious
>   economic quandary.
>   

It’s already pretty serious! While consumers are being helped, the energy related companies have gotten hurt and helped bring stocks down. Lower crude also makes stronger/USD harder to get overseas, so they stop buying our stuff like they were before. Domestics should pick up that slack as their oil bills go down, but there’s a big lag due to rising unemployment general economic disruption.

>   
>   Who said markets were understandable let
>   alone logical.
>   

Can’t remember. Probably me!


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Obamaboom fiscal fitness update

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Leaning in the right direction to restore demand.

A decisive move from the new Obama team is very possible given the latest rhetoric.

FACTBOX-Fiscal stimulus plans to tackle the crisis

Nov 23 (Reuters) – Countries around the world are setting out fiscal stimulus packages to help their economies withstand the impact of the global financial crisis.

Below are some details:

* AUSTRALIA:

— The government has announced a A$10.4 billion ($6.8 billion) package of cash handouts and family benefits and has pledged more if it is needed.

— It is providing A$1.5 billion to boost the housing and home building markets and doubling the grant for first-time home buyers. They will now get A$14,000 from an original A$7,000.

* CHINA:

— Provincial government plans will add an additional 10 trillion yuan ($1.464 trillion) to a 4 trillion yuan stimulus package announced by the central government earlier this month, state television said. The central scheme included rail and infrastructure schemes as well as extra social spending to offset the sharp drop in demand for the exports which fuel China’s economy.

— China is also changing value added tax (VAT) to allow companies to deduct the cost of capital equipment, saving them about 120 billion yuan a year.

* EUROPEAN UNION

– An economic stimulus plan to be presented on Nov. 26 will include a significant budgetary expansion, the head of the EU executive said on Friday, as it signalled longer deadlines for countries to slash budget gaps.

— German Economy Minister Michael Glos has said the plan envisaged, among other things, a 1 percentage point cut in value-added tax across the EU and that the total value of the stimulus was 130 billion euros ($163 billion).

* GERMANY:

— The government has announced a package which will generate about 50 billion euros ($64.22 billion) in investment and contracts.

– A new lending programme of up to 15 billion euros will be introduced for German state-owned development bank Kreditanstalt fuer Wiederaufbau (KfW) to strengthen its lending activities. KfW’s infrastructure programme for structurally weak local authorities will be raised by 3 billion euros.

— Urgent investment in transport will be accelerated via a new programme totalling 1 billion euros in both 2009 and 2010.

— Parliament has approved a rise in government net new borrowing in 2009 to 18.5 billion euros from 10.5 billion.

* NETHERLANDS

— The government has announced a “liquidity impulse” of about 6 billion euros ($7.5 billion), including allowing companies to write down investments earlier than usual.

— Companies will also receive temporary financial support from an unemployment fund to pay employees who will cut down on their working hours.

*RUSSIA

— Prime Minister Vladimir Putin on Nov. 20 unveiled a $20 billion economic stimulus package and help for people hurt in the economic slowdown. He offered assurances there would be no repeat of the economic turmoil when the Soviet Union collapsed in 1991 and, 10 years ago, when the state defaulted on its debt.

— The package will include a cut in profit tax, which accounts for 8.5 percent of budget revenues, to 20 percent from 24 now, and a new depreciation mechanism that will allow firms to reduce the profit tax further.

— The government has already sanctioned state-run banks to support industry with billions of dollars of soft funding.

* SOUTH KOREA:

— The government has unveiled a package worth at least 14 trillion won ($9.37 billion), including tax cuts

— Measures also include an extension of 1.3 trillion won to state-owned banks to help SMEs. The government is to expand credit guarantees to SMEs by 6 trillion won.

* SPAIN:

— In the last six months, Spain announced various measures to cushion the impact of the economic slowdown and soaring unemployment including a 38 billion euro ($49.28 billion) fiscal stimulus package.

— The package includes 6 billion euros in tax cuts and 4 billion euros of liquidity to credit strapped companies and households.

— It also includes a 400-euro income tax rebate for employees, pensioners and the self-employed.

* SWITZERLAND:

— The government announced an economic stimulus package worth 890 million Swiss francs ($753 million). It includes government spending of 340 million francs on flood defence, natural disasters and energy efficiency projects.

— Spending plans also include up to 1 billion francs on roads and railways and 550 million francs as tax breaks to 650 firms for job creation programmes.

* TAIWAN:

— Taiwan has announced T$122.6 billion worth of subsidies and tax cuts and T$58.3 billion of infrastructure spending. The steps unveiled are expected to generate T$1 trillion ($31.2 billion) in investment and consumption.

* UNITED KINGDOM:

— The government is expected to announce on Monday a package of tax cuts and extra public spending of upto 20 billion pounds ($29.70 billion), with the centrepiece a temporary cut in sales tax.

— The packagesis also expected to feature tax relief for small firms, efficiency savings and help for mortgage payers.

— British Prime Minister Gordon Brown said on Nov. 11 he was ready to borrow to provide the British economy a fiscal boost and he urged other countries to do the same.

* UNITED STATES:

— President-elect Barack Obama said he is crafting a two-year plan to revive the economy and save or create 2.5 million jobs. He called in October for a $175 billion stimulus measure but appears ready to for a much larger package. — Congressional Democrats have promised to make a broad economic stimulus a priority when they reconvene in January. The package is expected to include middle-class tax cuts and billions of dollars for public works projects, such as the construction of roads, bridges and mass transit. OTE]))

— President George W. Bush signed a $168 billion, two-year economic stimulus package into law in early 2008. Of that total, $152 billion was earmarked for 2008.

— The package includes tax rebates of up to $600 per individual earning $75,000 in adjusted gross income or less and $1,200 per couple plus $300 per child. Businesses would be able to deduct half the costs of purchases of new equipment. (Editing by David Cowell; +44 207 542 6486)


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Russian Central Bank spent $58 billion backing Ruble (Update1)

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Russian Central Bank Spent $58 Billion Backing Ruble (Update1)

By Alex Nicholson and Maria Levitov

Nov. 19 (Bloomberg) — Russia’s central bank spent $57.5 billion defending the ruble in September and October, Chairman Sergey Ignatiev said.

Why would they ‘defend’ the ruble? Maybe they ‘defend’ it selectively, via transactions with ‘insiders’ moving from rubles to dollars?

Russia held 45 percent of its reserves in U.S. dollars, 44 percent in euros, 10 percent in pounds and about 1 percent in yen on Nov. 1, Ignatiev, said in the lower house of parliament in Moscow today.

“Russia ensures the stability of its currency, given the fundamental indicators of our economy,” Finance Minister Alexei Kudrin told lawmakers today. The amount of reserves ensures “a firm foundation for macroeconomic stability, for stability of the national currency,” he added.

Looks like I’m wrong on suspecting insider conversion. Sorry!!!

Russia’s international reserves stood at $475.4 billion as of Nov. 7, the third-biggest after China’s and Japan’s. They have fallen $122.7 billion since Aug. 8 as the central bank shored up the ruble. The bank buys and sells currency to keep it within a trading band against a dollar-euro basket to limit the impact of exchange-rate fluctuations on the economy.

Right, that’s the reason…

Ignatiev also said that the central bank reduced its holdings of Fannie Mae and Freddie Mac bonds, which are held by Russian oil funds that are part of the reserves, to $20.9 billion on Nov. 1 from $65.6 billion on Jan. 1.

Explains some of the spread widening.

Fannie and Freddie were “taken under state control” in the U.S. in September, guaranteeing their reliability, Ignatiev said. The bank isn’t currently selling bonds of the two U.S. mortgage- finance companies, he said.

Right, not even if an insider wants to buy them with rubles.


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Eurozone trade deficit rising

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This is not a good sign given their monetary arrangements with no federal fiscal authority to incur the corresponding budget deficits, public and private.

And the unlimited Fed swap lines to the ECB could now be further increasing eurozone foreign currency debt, and funding imports with fresh ‘cheap and easy’ dollar debt.

Euro-zone trade deficit swells in September

Euro-zone trade deficit swells in September (AP) – The euro-zone swung to a trade deficit of 5.6 billion euros ($7.1 billion) in September from a 2.9 billion euro surplus last year. Imports surged 16 %in September from a year ago. Exports grew just 9 percent. The euro-zone trade deficit for the year to date — from January to August — now stands at 29.6 billion euros ($37.52 billion). Euro exports to the United States dropped 5 %from January to August from a year ago, Eurostat said. And exports to the currency area’s biggest customer, Britain, did not grow at all for the first eight months of the year. Imports from Russia climbed by a quarter over the same timeframe. Eurostat revised down its August trade figures, saying total euro-zone exports dropped 3 %during the month from a year ago. It originally reported a first estimate of 2 percent. Imports in August also grew less than expected — at 6 %instead of 7 percent.


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Re: Obama’s challenge- OPEC, the Saudis, and the Russians

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Yes, that’s the issue when there is more excess capacity than any one producer can afford to ‘allow.’

The excess production capacity (until recently) has been under 2 million barrels per day. This has allowed the Saudis to be ‘price setter’/swing producer as all other producers could produce flat out,
and the Saudis could set price and let their output fill the remaining demand of about 9 million bpd.

In July, however, Mike Masters triggered a massive inventory sell off as passive commodity players and specs hit bids to reduce positions, and the demand for physical inventories also fell as it seems many physical inventories probably had been held at relatively high levels in anticipation of higher prices.

This meant the Saudis could not control price without major and obvious production cuts- maybe $5 million bpd- to speed the inventory adjustment and retain their position as swing producer/price setter.

I looked at (guessed) the latest announced OPEC production cuts as a sign the Saudis thought the inventory liquidation was largely past and that they were again able to set price and let production adjust to the residual demand. With other OPEC members cutting output some, the Saudis could set price and expect the residual demand that determines their output would be that much higher.

Yes, demand is down in many regions, but so far no figures released on world demand for crude has indicated an outright decline in demand. Yes, some supply indicators are up some, but others are down. The balance is not clearly tipping to a large enough cut in net demand to dislodge the Saudis as price setter.

Note that West Texas crude is over $3 higher than Brent- a wider spread than the shipping charges might indicate. This implies a shortage of WTI. But at the same time the WTI futures markets are in contango, indicating comfortable inventory levels. Also, the gasoline crack has gone negative vs WTI, indicating perhaps it is being prices off of Brent which means the marginal supply is currently imported gasoline as domestic refiners continue to produce well below capacity.

Russia is the large non-OPEC exporter, and the recent meetings with the Saudis and the below commentary indicate some form of cooperation is in process.

What the oil exporters should be hoping for is a world wide move to restore aggregate demand without an immediate policy to reduce fuel consumption. That will enable the oil exporters to increase their real terms of trade via price hikes.

The darker side is that instead of looking to optimize their real terms of trade, their primary focus may be on keeping the western economies ‘weak’ to keep them focused inward and allow the Russians freedom to operate as they please in their regions of choice, and hasten the exit of the ‘infidel’ from Iraq and the rest of the middle east. In this case, price hikes will be used to keep the western economies weak and off balance, as they confront inflation, weakness, and deteriorating real terms of trade and standards of living, with real wealth moving towards the oil (and other energy) exporters.

On the other hand it is possible the oil exporters want to keep prices low enough to discourage moves away from petroleum, especially in the auto industry.

Point is, currently and for at least the next several years, the Saudis/Russians control price, and we can only guess to what end.

>   
>   On Tue, Nov 11, 2008 at 7:16 AM, wrote:
>   
>   One bit of news, brought to our attention by our friend, Mr. Elio Ohep, the
>   Editor/Publisher of the always interesting petroleumworld.com, is that of the
>   anger on the part of Russian Prime Minister Putin regarding the current price
>   for crude, and Russia’s apparent inability to do anything about it. Clearly
>   Putin & Company are upset by crude’s weakness, for much of the current
>   military build-up taking place there, and much of the infrastructure growth
>   taking place is predicated upon high priced crude oil. Speaking over the
>   weekend, Mr. Putin said that Russia must do what it can to influence oil
>   prices. He said, in an interview on Russian national television, that We need
>   to work out a whole range of measures that will allow us to actively influence
>   the market…As one of the major exporters and producers of oil and
>   petroleum products, Russia cannot stand aside from formulation of global
>   prices for this natural resource. There is little that Russian can do however
>   other than cut production and hope that others… especially OPEC…follows
>   suit. The problem that Russia, and Venezuela, and Mexico, and Ecuador, and
>   Indonesia, and Saudi Arabia and seemingly all of the oil producing
>   nations….especially Iran…. face is that they need the cash flow from crude
>   oil to keep buying the support of their restive populations. They’ve no choice,
>   and low prices make their jobs all the harder, for in hoping to keep their cash
>   flows high they need to pump more, not less, crude. Putin and Ahmadinejad
>   find themselves as uncomfortable brethren in economic arms, hoping that the
>   other will cut production.
>   


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Re: Commentary

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>   
>   The banks using the ECB’s liquidity program deposited a record 160
>   billion Euros with the ECB overnight, rather than lend them to other
>   banks or market participants.
>   

Jeff, ‘lending them out’ wouldn’t have changed that number. At most it would have moved the funds from one bank’s reserve account to another. So maybe, they did ‘lend them out’. Best indication is the interbank rates, but even that’s not definitive.

>   
>   Russia is going to base missiles on EU border. That should go well. In
>   unrelated news, they are also planning to build a deep-water port in
>   Venezuela that will allow Russian warships to dock there. Hamas
>   militants pounded southern Israel today with a massive barrage of 35
>   rockets, after Israeli forces killed six gunmen. So much for the
>   five-month truce. China has so far sentenced 55 people for riots
>   against Beijing’s rule that broke out in Tibet in March. No word yet on
>   the other 147 people who stood trial. Iran has warned the US again
>   not to violate its airspace.
>   

Good luck to us!


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OPEC cuts production by 1.5 million barrels a day

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I take this as a signal that the Saudis (and probably Russians as they just met with the Saudis) have decided to hold or raise prices and let quantity sold adjust.

Fuel prices are low enough to restore growth in demand with any positive economic performance.

Oct. 24, 2008

The Organization of Petroleum Exporting Countries decided to make a deep cut in oil production, taking 1.5 million barrels a day off global markets as it embarks on the task of managing prices amid a potential global recession.

December light, sweet crude oil futures fell $3.34 to $64.50 a barrel in electronic trading on the New York Mercantile Exchange by midday in London.


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