@dlacalle_IA
In this short video we mention the challenges facing the economy and consensus estimates for 2017. We will expand shortly with more details. Hope you like it.
Daniel Lacalle is an economist and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
www.dlacalle.com
@dlacalle_IA
Over the weekend OPEC and non-OPEC countries delivered the first coalition cut pledge in 15 years with 11 non-OPEC countries agreeing to cut output by 0.56 mbpd. This is on top of the pledge from OPEC to lower output by 1.2mbpd as well.
Russia 300k, Mexico 100k, Oman 40k, Kazakhstan 20k, Azerbaijan 35k the bulk of the cuts.
One of the big problems of this agreement is the alternative of the devil. That by which a decision is likely to have negative or very negative consequences.
The main beneficiary will be the shale in the US, immediately taking the opportunity to increase volumes. US rigcount surged 27 units to 624 on the week ending on the 9th december, up 220 since May 27 and the biggest increase since 2014.
Additionally, the image of producers acting to harm consumers will accelerate substitution -electric vehicles, efficiency measures- from importers.
Then there is the issue of compliance.
OPEC has a notorious history of non compliance with supply cuts. Members tend to cheat on quotas and, as prices rise, volumes pick up again.
But let´s remember that this “deal” comes after OPEC increased production from 30mbpd to 33.6mbpd. That is, it´s a deal to cut just a part of the increase, to 32.5mbpd.
I have been invited four times the annual meeting of OPEC in Vienna and I have seen many myths spread by the media. Let us remember for a moment why OPEC agreements do not happen easily.
Let us remember that the most “optimistic” see a market balance in 2H2017 after this cut pledge, so there is a strong risk that it may not happen at all.
Even after these cuts -if they happen-, oversupply in the market exceeds 500kbpd and spare capacity is higher than 2.6mbpd. Meanwhile, the IEA has revised up estimates of US production by c500kbpd. It could go as high as 1mbpd in less than a year.
Dallas Federal Reserve President Robert Kaplan estimates that US oil production has potential to top 11mbpd in less than two years and most market participants, including the IEA, see a very likely short-term increase increase to 9mbpd from current 8.6mbpd. Continental Resources CEO Harold Ramm goes as far as to say that US shale producers could increase output to 20mbpd.
This oversupply is also evident in the huge amount of oil stored on ships, already at the same levels of 2008, about eight million barrels.
OPEC will only succeed if demand strengthens and oil producers make it clear that they are much more flexible and competitive than other alternatives. If they fall into the trap of a pointless cut, substitution and technology will accelerate the process of stripping oil of its crown as king of primary energy sources.
Daniel Lacalle is an economist and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
This article was originally published in Spanish by @elespanol
@dlacalle_IA
“Why be shy when you can kick the can and shout ” Sean O’Hagan
When Mario Draghi, the president of the European Central Bank (ECB), analyzed the eurozone’s macroeconomic and monetary data on Thursday, he confirmed a very fragile environment and disappointing figures. However, the stock markets reacted on the upside. Why?
The results
The European economy will grow by 1.7% in 2016 and 2017 and 1.6% in 2018 and 2019. Despite flooding the system with liquidity, expectations have not increased. And, in fact, the risks remains “on the down side” according to Draghi himself.
In terms of monetary aggregates, the increase in M3 fell to 4.4% annualized compared to a growth of 5.5% in September. Loans to the non-financial sectors grew a meager 2%. Remember that all this is happening with the greatest monetary stimulus seen in the history of the euro.
What about inflation? It increased from 0.4% in September to 0.6%. But it is fundamentally because of the cost of energy. Draghi himself recalled that “there are no convincing signs of recovery of underlying inflation” – that which excludes energy and food-.
The velocity of money (nominal GDP / M2) – which measures economic activity – is at multi-year lows and more liquidity and low rates does not help improve it. QE is disinflationary for prices because it sinks interest margins of banks by artificially lowering bond yields and makes economic agents behave with more caution – not rush to spend or to borrow – due to the perception that the cost and quantity of money is artificial. But it is very inflationary in financial assets.
What these figures tell us is that growth is still very poor and the huge amount of monetary stimulus created from the Central Bank does not have the effect that its defenders promised. The European Central Bank’s balance sheet has soared to 3.58 trillion euros, more than 400 billion euros above its 2012 high, and the accumulation of risks is more than evident, even if many decide to ignore them.
The risks
Since the repurchase program was launched in 2015, the excess liquidity accumulated in the system has soared to more than one trillion euros.
The euro-zone has more than 4.2 trillion euros in bonds with zero or negative rates, according to Bloomberg.
The ‘inflation’ that we are told does not exist, lies in the huge bubble of bonds and ultra-low bond yields. This accumulation of risk is exactly as dangerous as that of 2006-2008 but potentially more difficult to contain, since economic agents are not in a better position of solvency and repayment capacity today than in that period, particularly governments, which are much more indebted. This leads to ineficient and heavily indebted governments falling into the trap of thinking that cheap money will always exist and decide to increase their imbalances, entering into a debt shock when rates rise.
If EU countires get used to ultra-low rates the risk of multibillion nominal and real losses in bond portfolios and pension funds is enormous, because the tiniest tilt in inflation will make the house of cards collapse. Goldman estimates losses of $2.5 trillion worldwide from a 1% rise in inflation. It is so relevant that if interest rates raised a stunted 1% in the EU it would lead to massive budget cuts to maintain current deficits.
Of course, Draghi does not stop repeating, and he did it again on Thursday, that this period of excessive liquidity must serve to correct imbalances and implement structural reforms. But no one seems to listen. Cheap money calls for cheap action. More “fiscal stimulus” and more spending.
Draghi, knowing that almost no eurozone economy could absorb the rate hikes and increased risk if the repurchase program ended in March 2017, as it was announced, decided on Thursday to extend it until December although “reducing” the pace of purchases. That is, kick the can forward and an optical reduction because tapering from 80 to 60 billion per month is irrelevant when excess liquidity in the system has soared from about $ 125 billion to $ 1 trillion in the QE program period.
With this measure, Draghi seeks to achieve two things: That governments reconsider their positions and put structural measures in place without creating a serious liquidity problem. On the other hand, to help the yield curve reflect a slight rise that helps banks out of the hole in which they are with negative interest rates.
The problem is that the structural challenges of the European economy -demography and overcapacity- are not solved by perpetuating imbalances because governments and economic agents simply get used to seemingly temporary measures as if they were eternal.
The perception of excess savings is incorrect in heavily indebted and overcapacity-ridden economies. There is talk of excess savings with respect to investment because the 2001-2007 period of excess spending and debt bubble is used as “normal”. And the central bank floods the market with liquidity thinking that investment will increase if rates fall. As if such drop in rates was “demanded” by the market. But investment is still stagnant with zero rates. Because there is no demand for solvent credit and there is spare capacity after years and years of industrial plans and excesses.
Risk assets jumped on the evidence that such excess liquidity will continue to inflate the bond bubble and hopefully support other financial assets. And in December 2017, if the monetary laughing gas ends, governments will blame Draghi, or Merkel, and not the inaction of a European Union happy to continue with interventionist and anti-growth policies.
And no, most European states are not prepared for the end of QE. They are geared to its extension.
Daniel Lacalle has a PhD in Economics and is author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
This article was originally published in Spanish by @elespanol
It is not easy to understand. If one looks at media comments, China is the world´s largest renewable capacity installer. However, if we analyze the numbers of new capacity in the country and both the current and long term energy mix, the big winner is coal!
To celebrate that my book The Energy World Is Flat (Wiley, with Diego Parrilla) is to be published in China, I would like to analize the Chinese energy policy.
This year, China reduced by 30% its renewable capacity targets, but that is not a negative. China will install 110 gigawatts of solar and 210 gigawatts of wind by 2020 with the new plan. It is estimated that by 2020 15% of its energy mix will come from non-fossil fuel energy.
But 73% of electricity in China comes from thermal generation. And in 2015, 50% of the new capacity was also thermal. China´s energy mix in 2020 will come overwhelmingly from coal (65%) and nuclear. Solar, for example, will likely weigh less than 5%.
In China, the energy mix is decided from three perspectives: Benefit for the Chinese economy and jobs, competitiveness and local control of technology. Once we understand this, it is normal to understand why coal is still supported. It covers the three requirements, jobs, cost and control of the process.
Between 2013 and 2015, 50.8 gigawatts of capacity were added in coal generation. This means that in two years coal added almost half of what China plans to install to 2020.
According to official figures, there are a further 42 gigawatts of coal plants under construction, with 11 gigawatts approved only in 2015. Meanwhile, China has retired less than 10 gigawatts of obsolete capacity. If we add the figures on nuclear energy, China’s decision to double its nuclear capacity to 23 gigawatts more and go ahead with another 50 planned gigawatts places to China as the largest installer of new nuclear power in the world ( 136 reactors of approximately 340 planned in the world ).
The question, therefore, is why?
On the one hand, China’s consumption accounts for almost 50% of global coal demand, but it imports very little. First incentive in favour of coal: the balance of payments.
On the other hand, the vast majority of coal companies in the country are state owned. Second incentive: “Support” employment and “indigenous industry.” China knows that replacing coal with renewables has a negative net effect on employment, even if it is unquestionnably a creative destruction and positive from an environmental point of view. So transitions from fossil fuel to renewables have to be slow, because they affect jobs and can increase the cost of energy dramatically.
Finally, the cost and technology control. For China, which seeks to reduce its huge imbalances exporting, launching a race to renewables that ignores the cost of energy would be suicidal. But it is even more negative for its technology payment account, so it can be strategically potentially dangerous.
Despite the drop in costs, the average cost of electricity from coal in the country is much lower than solar photovoltaic, less than half. The CEO of Canadian Solar or Dinghuan Shi, chairman of the China Renewable Energy Society, estimate that solar PV will be competitive with coal in 2025, not earlier.
Of course there are environmental factors that should not be ignored, and China has reduced emissions significantly in the past years. So much in fact, that the CO2 emissions reduction of 2015 is equivalent to 200 million tons of CO2. That is roughly equal to the cumulative emissions from the 100 countries with the lowest emissions 5 . China is now on a path to achieving its Paris climate commitments well before its 2030 target date.
China´s energy revolution will happen as long as it does not damage competitiveness and jobs. China can benefit more than any other country in the world from what we call the energy broadband and the technological revolution … When costs are proven to be lower.
Daniel Lacalle is an economist and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)
This article was originally published in Spanish by @elespanol