Chinese markets dive below ground “zero”

August 25, 2015

I thought that the “bottom” for the Shanghai Composite Index was at about 3100. Yesterday the SCI dropped below 3000.

SCI Aug 25th 2015 Yahoo

SCI Aug 25th 2015 Yahoo

I think Shanghai at 2950 is undervalued now, but I am no longer sanguine about when it might hit a floor and begin to bounce back. The speed of the decline in the last week indicates that even 2500 is not impossible. The risk is that it will drag the global markets down as well.

Perhaps the turnaround can only come when oil price has dropped to $30/barrel?

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Oil price destroys viability of Scottish independence

August 24, 2015

The Scottish National Party (SNP) once had budgeted on the basis of oil price being $115/ barrel. Then at the time of the referendum they assumed a price of not less than $100/barrel giving a tax revenue of not less than £7 billion per year which would offset the “subsidy” that Scotland gets from the rest of the UK of about £9 billion per year. This tax revenue drops to zero with a North Sea oil price of less than $50/ barrel.  But the breakeven price for oil producers is even higher:

Forbes (Jan 2015): Some prospects, including almost all activity West of Shetlands, are considered unprofitable below $100 per barrel. Mature oil wells struggle to be viable below $60, so BP has decided that 200 jobs and 100 contractors’ roles would go following a review of its North Sea operations managed out of Aberdeen, Europe’s oil and gas capital. Looking ahead, BP forecasts the oil price to remain in the $50 to $60 price range for next three years. ………

Either way, BP’s take has darkened the mood in the British and Norwegian sectors of the North Sea. However, it isn’t the first to announce job cuts. If anything, BP’s move is pretty predictable given the company has been quite clear about reducing employee headcount.

Shell, Statoil and Chevron have made similar announcements while ConocoPhillips has also been clear about a need to “streamline operations.” As operators downsize, oilfield services companies would invariably feel the pinch from independent upstarts to market leader Schlumberger.

But reality is biting hard. It is now more likely that Brent oil price will be trapped between $30 and $40 for the next 2 -3 years. Costs of production in the North Sea have not come down much compared to the sharp decline in US production costs of oil from fracking. And now Iranian oil will take its market share. At these prices the North Sea oil producers will be losing money on each barrel produced. Production is likely to be scaled down sharply and investment will drop to a trickle. Onshore jobs involved in both exploration and production (Norway, Holland, Scotland) must decrease. The Norwegian and Scottish production will bear the brunt of this turndown. Norway has built up a huge reserve fund and can weather a storm but not a permanent downturn, The UK economy can take the hit but an independent Scotland would be very hard hit. The introduction of shale fracking in England – which could take advantage of the the production cost reductions achieved in the US – could not only mitigate the risk but add a new source of jobs and tax revenue. The largest cost reductions in the production of oil from shale have come in the non-unionised part of the industry. There is considerable oil shale in Scotland as well, but I expect the SNP and the UK unions to be far too short-sighted and to do their damndest to prevent the introduction of fracking.

Nasdaq brent oil 10 year chart Aug 2015

Nasdaq brent oil 10 year chart Aug 2015

At less than $40/barrel, the SNP would need to create some very strange, fantasy budgets to prove the viability of an independent Scotland. Perhaps they could just nationalise everything and print money.

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If the EPA had been BP, they would be liable for billions

August 23, 2015

The US Environmental Protection Agency is not the most impressive of organisations – either in efficiency or in their “politically correct” policies or in their complete lack of common sense. No doubt they have done some good work – more by accident than by design – but they suffer from the irresponsibility that comes from the lack of accountability and liability that “government” or “international” organisations are subject to. Just as UN troops get away with rape and murder and pillage in the CAR because they shelter under the immunity that they have, so does the EPA get away with little more than a slap on the wrist for the massive pollution that they have caused by releasing toxic heavy metals from the Gold King Mine near Silverton, Colorado into rivers in Colorado, New Mexico and Utah. If the EPA had been a private company (say BP) they would by now have been facing billions in compensation claims.

Over a million gallons of mine wastewater has made it's way into the Animas River.

Over a million gallons of mine wastewater has made it’s way into the Animas River, closing the river and putting the city of Durango on alert. (Brent Lewis/The Denver Post/Getty Images)

Now it turns out they were well aware of the risks of a blowout before they caused the blowout.

TPM:

Internal documents released late Friday show managers at the U.S. Environmental Protection Agency were aware of the potential for a catastrophic “blowout” at an abandoned mine that could release “large volumes” of wastewater laced with toxic heavy metals.

EPA released the documents following weeks of prodding from The Associated Press and other media organizations. EPA and contract workers accidentally unleashed 3 million gallons of contaminated wastewater on Aug. 5 as they inspected the idled Gold King Mine near Silverton, Colorado.

Among the documents is a June 2014 work order for a planned cleanup that noted that the old mine had not been accessible since 1995, when the entrance partially collapsed. The plan appears to have been produced by Environmental Restoration, a private contractor working for EPA.

“This condition has likely caused impounding of water behind the collapse,” the report says. “ln addition, other collapses within the workings may have occurred creating additional water impounding conditions. Conditions may exist that could result in a blowout of the blockages and cause a release of large volumes of contaminated mine waters and sediment from inside the mine, which contain concentrated heavy metals.”

A subsequent May 2015 action plan for the mine also notes the potential for a blowout.

I don’t hear much from the usually strident environmental lobbies for whom the EPA can do no wrong.

Related:

How the EPA managed to spill 3 million gallons of mining waste into a Colorado river

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Where’s the bottom for this crash?

August 21, 2015

We are in a crash currently. It is more than just summer doldrums. It may not be as deep and as comprehensive as the 2008 crash but we still have a way to go to hit bottom. Every crash always presents a new investing opportunity (even for pessimists). But it is trying to predict the bottom while the crash is occurring that is difficult. Lagging indicators like gold are not particularly useful.

As a layman investor, I can only try and define parameters which I believe represent the bottom. Of course these parameters are never all met simultaneously and can even seem to be opposed in phase. Finally, any investor will just have to take a call. I find inflation and interest rate movements in different countries too complex and too confusing to be useful as indicators. Inflation is at unhealthily low levels globally but is a very “messy” indicator since countries and regions are not in phase. My expectation is that the markets reaching bottom will coincide with EU inflation having picked up and approaching about 1% (average) – probably by the end of 2016. US and China should exhibit somewhat higher values while inflation in India should still be trending downwards and approaching about 3%. Interest rates in the EU and the US will only pick up once inflation can be seen. In India interest rates are far too high for the prevailing inflation, but the fear of rampant inflation is so high that rates are not being reduced as they should be. I suspect that Indian interest rates will not reduce till after all the “monsoon risk” has passed. That takes us to after October this year.

That leaves me with two “indicators”.

  1. I think the first has to be the Chinese markets (which embodies all the Chinese parameters). Irrespective of what happens elsewhere, the global economy needs the Chinese economy to stabilise and start moving upwards again. The bubble has burst but all the excess has not yet been expelled. The bottom for the Shanghai Composite Index lies at about 3100-3200. That is about 15% lower than current valuations. Because of recent forced share buying activities by the Chinese institutions the market distortions and the Chinese “slowdown” will run till November/ December this year. The Chinese “opportunity” will come when the SCI falls back to the level of the underlying, sans bubble, growth. The current value is just over 3500 (the same as about a month ago).

2. Oil – Oil price is still much too high for the glut that exists. Iran is coming back into the picture and fracking is getting cheaper. Currently WTI is just above $40/barrel with Brent at $45. Any recovery will need the perception that energy costs will be sustainably low. That I think will be when prices are around 20-30% lower than today. Possibly with WTI back to its “traditional value” of $30/ barrel with Brent at about $34.

So I’m looking for the SCI at or less than 3200 and oil prices of about $30/barrel to start getting bullish again. That will not be before November/December this year.

And until then its probably best to keep cash under the mattress.

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TIF 1- Djurgården 5

August 20, 2015

TIFOur local football team, Torstorps IF plays in one of the two sections of Division 4 in the county of Östergotland. In their own league table they are running second. They had the good fortune this year to have have been allotted a match, at home, in the 2nd round of the Swedish Football cup, against mighty Djurgården. (That’s like a village team being drawn against Man U in the FA Cup). Local crowd records were broken easily and when I arrived I only got a seat  among the Djurgården crowd for the first half. The discussion around me was whether they were going to win by 6 or by 12.

TIF is just a little club by most standards but has been going for 80 years. The Finspång municipality only has a population of some 25,000 but Torstorp still manages to run 15 teams, of which 10 are children’s teams (including two girls teams), one junior team, one youth team and the A team. It was a lovely day in bright sunshine and virtually all Finspång children were there. There were many more matches going on off the pitch than on it. Hot dogs and burgers ran out.

IMG_1744

20150820 Atlaslunden

In the event the team did us proud.

Djurgården did not even manage to get 6.

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Chastity belts to protect the Missouri legislature?

August 20, 2015

c. 1405 wikipedia

This little article conjured up a vision of all interns at the Missouri legislature being required to wear chastity belts.

TPM:

The Missouri legislature would like to continue its internship program despite the program being marred by the recent sexual harassment of interns.

The idea the lawmakers have come up with? Imposing a dress code for the interns to “help everyone keep their focus on legislative matters.”

Missouri state Rep. Kevin Engler (R) sent a memo to his colleagues Monday night with suggestions, including minimum number of credit hours for participation and mandatory sexual harassment training for both interns and lawmakers, according to the Kansas City Star on Tuesday.

The move came after two legislators, including former Missouri House Speaker John Diehl (R), resigned amid allegations of sexual harassment of interns. State Rep. Bill Kidd (R) responded to Engler with a suggestion of his own: “Intern dress code,” he wrote, according to the newspaper. Rep. Nick King (R) agreed, the newspaper reported.

Jessica Tigra – Denver Fashion Week – Ira Sherman Chastity belt Couture 2014: Couture 2014

I suppose it makes sense to the legislators to put the onus on their victims. A case of locking up the temptations that arouse the base instincts of the predators?

Of course all this led to further visions of compulsory chastity belts being used as fashion statements. Some changes to materials would be required. Metal would have to be replaced by some new fabric though chain-mail could still work. Kevlar and diamonds perhaps for casual Fridays and more formal wear for regular use? Of course it would all have to be unisex. Moulded, kevlar jeans could work quite well.

 

 

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Trump has more support on immigration than political correctness allows

August 19, 2015

Good clowns – in amongst their antics – have the ability to hit the right nerve, to trigger something primal in our emotions.

Donald Trump is no doubt a “clown”. The politically correct media and politicians are pouring scorn on his immigration positions. But he may be tapping in to something felt strongly by many but which they have been unable to express for fear of being politically incorrect. He may be reflecting the mood in the country – and not just among Republicans – far better than anybody dares to give him credit for:

Rasmussen Reports:

As far as voters are concerned – and not just Republicans –  Donald Trump has a winning formula for fighting illegal immigration.

My take aways from the report:

  1. The latest Rasmussen Reports national telephone survey finds that 70% of Likely Republican Voters agree with the GOP presidential hopeful that the United States should build a wall along the Mexican border to help stop illegal immigration.
  2. Ninety-two percent (92%) of Republicans agree that the United States should deport all illegal immigrants who have been convicted of a felony in this country.
  3. Among all likely voters, 51% favor building a wall on the border.
  4. Fifty-four percent (54%) of voters disagree with the current federal policy that says a child born to an illegal immigrant here is automatically a U.S. citizen.
  5. Just 34% favor President Obama’s plan to protect up to five million illegal immigrants from deportation.
  6. … most voters want the border with Mexico secured to prevent further illegal immigration before there is any talk of amnesty. In May, 63% said gaining control of the border is more important than legalizing the status of undocumented workers already living in the United States, the highest level of support for border control since December 2011. 
  7. Sizable majorities in nearly all demographic categories favor deporting illegal immigrants convicted here of felony crimes. But Democrats are less enthusiastic about such a policy than Republicans and voters not affiliated with either major party are. Only 30% of Democrats favor building a wall, compared to 57% of unaffiliated voters.
  8. Trump took a lot of criticism last month from Democrats and other Republican presidential hopefuls over his candid remarks about the criminality of many illegal immigrants, but most voters agree with Trump that illegal immigration increases serious crime in this country.

Trump’s Republican rivals are gradually realising that the agenda is being set by Trump.

I wonder how long it will be before the main stream media jump on the band-wagon. If they do start covering him more seriously and then perhaps even backing him, then my reading is that Trump could “go viral”  and walk away with the nomination.

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Physics came first and then came chemistry and later biology

August 19, 2015

I generally take it that there are only 3 basic sciences, physics, chemistry and biology. I take logic to be the philosophical framework and the background for the observation of the universe. Mathematics is then not a science but a language by which the observations of the universe can be addressed. All other sciences are combinations or derivatives of the three basic sciences. Geology, astronomy, cosmology, psychology, sociology, archaeology, and all the rest derive from the basic three.

I was listening to a report today about some Japanese researchers  who generated protein building blocks by recreating impacts by comets containing water, amino acids and silicate. Some of the amino acids linked together to form peptides (chained molecules). Recurring lengths of peptide chains form proteins and that leads to life. What interested me though was the element of time.

Clearly “chemistry” had to exist before “biology” came into existence. Chemistry therefore not only comes first and “higher” in the hierarchy of the existence of things but is also a necessary, but insufficient, requirement for “biology” to exist. Chemistry plus some “spark” led to biology. In that case the basic sciences are reduced to two since biology derives from chemistry. I cannot conceive of biology preceding chemistry. The elements and atoms and molecules of chemistry had to exist before the “spark” of something brough biology into existence.

chemical reactions (chemistry) + “spark of life”(physics?) = biology

By the same token, does physics precede chemistry? I think it must. Without the universe existing (physics) and all the elements existing within it (which is also physics) and without all the forces acting upon the elements (still physics), there would be no chemistry to exist. Or perhaps the Big Bang was physics and the creation of the elements itself was chemistry? But considering that nuclear reactions (fusion or fission) and the creation of new elements are usually considered physics, it would seem that the existence of physics preceded the existence of chemistry. The mere existence of elements would be insufficient to set in motion reactions between the elements. Some other forces are necessary for that (though some of these forces are even necessary for the existence of the elements). Perhaps physics gives the fundamental particles (whatever they are) and then chemistry begins with the formation of elements? Whether chemistry starts with elements or with the fundamental particles, physics not only must rank higher as a science, it must have come first. Particles must first exist before they can react with each other.

Particles (physics) + forces (physics) = chemistry.

In any event, and by whatever route I follow, physics preceded chemistry, and physics must exist first for chemistry to come into being. That makes chemistry a derivative of physics as biology is a derivative of chemistry.

We are left with just one fundamental science – physics.

by elfbrazil wikipedia

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Oil down to $12/barrel? Unthinkable? Maybe not

August 18, 2015

When oil reached well over $100/barrel, the “peak oil”, Malthusian scenarios were dusted off and regurgitated ad nauseum.

Then came the drop in demand after the financial crisis and prices came back under $100 as reality set in. The disturbances of reduced production from Iraq, Libya and sanctions-hit Iran could not bring the price back up with demand as low as it was. Then came fracking and flooded the market with oil. Price came down to c. $60. Saudi Arabia did not decrease production but instead started a price war to kill of the nasty frackers and to maintain their market share. Prices should have dropped to less than $30 but stayed up above $50 on hopes of increased demand eventually coming through and hopes that China would get going again. Inventories have grown to record levels.

Oil inventory August 2015

Oil inventory August 2015

But now the hopes of a Chinese recovery anytime soon are beginning to dissipate. Prices have dropped below the psychologically important $50/barrel.

Business Insider: ….. WTI crude oil futures are trading near $42 a barrel while Brent futures are just above $48 a barrel.

And now the talk of oil prices below $20/ barrel, perhaps even as low as $12 are no longer looking ridiculous. David Kotok was talking to Bloomberg.

Oil prices have hit six-year lows, and Cumberland Advisors’ David Kotok thinks the worst may be yet to come.

“We could go back to $15 or $20, this is a downward slope, we don’t know a bottom,” Kotok said in a Monday morning interview on Bloomberg TV. …….. 

Kotok said that despite the oil industries apparent belief that things will get better, there is little reason for anything to change.

“Hope is not a strategy, it’s a myth,” he said. “The fact is, we don’t have the drivers.”

The good news is that there’s good news. When asked about the lack of an increase in consumer spending despite the more favorable oil and gas prices, he said it will come.

“When the oil price goes down that means you get the first kick, but the you have to wait for the consumer to wake up and say ‘Gee, I’m going to have more money for longer, I’m going to spend it’,” Kotok said. “I think that there is a huge boost in consumer spending coming when people begin to accept the fact that this is a permanent shift not a temporary shift.”

Some net oil consuming countries will get a “windfall” to help them kick-start their economies. But prices could stay down for a long time yet until a sustained, global consumer boom truly develops.

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Isn’t it rich …..

August 18, 2015

The clowns have it so far.

Donald Trump is being taken as a “serious clown” and so is Jeremy Corbyn in the UK Labour party. Even the Democrats are beginning to realise that they need to lighten the staid, boring and almost too earnest bill of fare they have to offer. They need a clown.

In the US, Donald Trump is setting the agenda from the front and his act is beginning to attract even his rivals. Scott Walker and other Republicans are jumping on Trump’s immigration train (children of illegals born in the US should not have automatic citizenship and The Wall). Former senator Rick Santorum (Pa.) and Louisiana Gov. Bobby Jindal have also hopped onto this train. Even the Washington Post is beginning to analyse Trump’s positions – as they gather flesh – a little more seriously.

In the UK Labour party leadership fight, Corbyn the clown is so far ahead that his nearest rival (also union supported), Andy Burnham, is now finding that he actually does not disagree with Corbyn all that much. It looks like the Unions will win and that the Labour party is starting down the road to oblivion.

But the Democrats are looking more jaded each day. Hilary Clinton, Bernie Sanders, Joe Biden and Al Gore are all coming off as “has-beens and past-its”. Sanders has tried to take on the mantle of a clown but does not quite make it. They desperately need someone to capture the Democratic imagination. Where are the clowns?

The Trump phenomenon continues and the latest Fox poll puts him at 25% and his nearest rival 13 points behind.

WaPo:

The ideas once languished at the edge of Republican politics, confined to think tanks and no-hope bills on Capitol Hill. To solve the problem of illegal immigration, truly drastic measures were necessary: Deport the undocumented en masse. Seize the money they try to send home. Deny citizenship to their U.S.-born children.

Now, all of those ideas have been embraced by Donald Trump, the front-runner in the Republican presidential race, who has followed up weeks of doomsaying about illegal immigrants with a call for an unprecedented crackdown.

On Monday, Trump’s hard turn was already influencing the rest of the GOP field. In Iowa, Wisconsin Gov. Scott Walker also began to call for a wall on the U.S.-Mexico border, echoing a longtime Trump demand. Walker said the separation barrier between Israel and the Palestinian territories is proof that the concept could work here.

Walker also seemed to echo Trump by questioning “birthright citizenship,” the constitutional provision that grants citizenship to anyone born in this country. After a reporter asked if birthright citizenship should be ended, Walker said: “I think that’s something we should — yeah, absolutely, going forward.”

The Hilary Clinton momentum is dissipating away with her e-mails. Even the rabidly supportive Huffington Post is getting concerned:

Things are getting weird when even Al Gore is thinking of getting into the Democratic presidential race, which is turning into a last hurrah for the Baby Boomers and their tad-older camp counselors.

Hillary Clinton, permanently punctilious, has done everything right: She put her HQ in Brooklyn, hired savvy digital/social/big data nerds, raised a ton of dough, gave substantive, well-thought-out speeches and flooded early primary and caucus states with organizers. She’s still the default bet for the Democratic nomination: national polls show her with a fat 36 percent lead.

And yet all is not well in Hillaryland. Polls also indicate that voters now view her as untrustworthy. Sen. Bernie Sanders (I-Vt.), whose DeLorean time machine is in overdrive, is drawing colossal crowds and, according to one poll, now leads the former secretary of state in New Hampshire. Vice President Joe Biden, who had previously said “no way,” is now sounding serious about jumping in. So, we are told, is Gore, who was warning of environmental doom as far back as the ‘60s.

Meanwhile the Guardian reports:

Andy Burnham has made an explicit plea to anyone thinking of voting for Jeremy Corbyn as Labour leader to pick him instead for what he described as “the worst job in politics”, saying there was “a good deal of common ground” between him and the veteran leftwinger.

Sondheim again –

 Isn’t it rich?
Are we a pair?
Me here at last on the ground,
You in mid-air.
Send in the clowns.

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