Dead Cat Bounce? Oil Prices After King Abdullah's Death

Meet the new boss [L], same as the old boss [R]?

This has been an atypical year with lots of Saudi-related posts, but this one cannot be ignored: The newswires were all abuzz this morning about the passing away of King Abdullah, formerly Crown Prince Abdullah before his half-brother King Fahd passed away in 2005. Now that he too has died, Abdullah's half-brother Salman has become Saudi king. In terms of the broader energy market, the notable news is that oil prices have bumped up slightly on the news. To be sure, Abdullah's passing was not unexpected since he has not been in the best of health in recent years and succession plans were already well-known:

Oil prices jumped on Friday as news of the death of Saudi Arabia's King Abdullah added to uncertainty in energy markets already facing some of the biggest shifts in decades. Abdullah died early on Friday and his brother Salman became king in the world's top oil exporter. Salman named his half-brother Muqrin as heir, moving to forestall any succession crisis at a moment when Saudi Arabia faces unprecedented turmoil on its borders and in oil markets.

Brent crude futures rose to a high of $49.80 a barrel shortly after opening before easing back to $49.30 a barrel by 0650 GMT, up 78 cents. U.S. WTI crude futures were at $47, down from a high of $47.76 earlier in the session."This little spike in prices is understandable. But this is a selling opportunity in our view. It should be sold off quickly and it won't last long at all," said Mark Keenan of French Bank Societe Generale. After seeing strong volatility and price falls earlier in January, oil markets have moved little this week, with Brent prices range-bound between $47.78 and $50.45 a barrel

To be sure, there are no expected changes in Saudi policy, especially in terms of cutting oil production as OPEC's most vulnerable members like Venezuela suggest:

The new king is expected to continue an OPEC policy of keeping oil output steady to protect the cartel's market share from rival producers. "When King Salman was still crown prince, he very recently spoke on behalf of the king, and we see no change in energy policy whatsoever," Keenan said.

Analysts said almost equally as important as the royal succession to energy markets would be whether Saudi oil minister Ali Al-Naimi, in office since 1995, might step down. "The real question is if there is a new oil minister soon," asked FGE analyst Tushar Bansal, adding that Al-Naimi had reportedly wanted to step down but been convinced by King Abdullah to stay on.

Even if the oil minister Al-Naimi is replaced, there is little likelihood that Saudi leadership will curtail Saudi output. Why this move upwards in oil markets, then? I believe that the phenomenon of  none of the major producers curtailing their output (least of all Saudi Arabia) is still putting downward pressure on oil prices. What appears to be a brief move upwards is a "dead cat bounce" in what appears to be a prolonged bear market absent major supply disruptions in the near future. So King Salman is a force for continuity rather than change, and replacing the oil minister with someone else is unlikely to result in any changes. However, in this kind of market, any sort of event that can at marginally raise doubts about the continuity of policy in the world's largest oil exporter is viewed with some interest. Perhaps Salman is ever-so-slightly more hawkish on output? Perhaps Al-Naimi will be replaced by someone not as bold as to say Saudi Arabia will "never cut oil prouction"?

When trading is range-bound as it is now, those few dollars and cents of movement mean a lot more than they did in the months before, and we are bearing witness to that right about now. 

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Professional Stand-In-Liners, a Venezuelan Profession

"Everyday I dream dipeys don't run out once I finally get into the store."

To be sure, professional waiters-in-line are not unique in Latin America. In countries like Brazil where red tape was (still is?) prevalent and people had to stand in line at government offices to obtain various licenses and permits, there already were folks offering to wait for you all day long. There is a term for them; it's on the tip of my tongue but I forget at the moment. (Do e-mail me if you can provide the correct Portugese term.) Indeed, it is not only a "third world" phenomenon as those buying Apple iPhone 6s have relied on those offering to stand in the queues outside Apple stores. (Such meaningful lives these people lead, living for the release of new Apple phones.)

The recent Zimbabwe-fication of Venezuela, however, is setting new standards in this, ah, line of depravity. In the absence of anything better to do--abundant workers and no real jobs to be found can do this to you--there are now legions of Venezuelans who line up without anyone asking them to. Their logic is that desperate folks will come along later in the day who will pay relatively great sums in today's inflation-hit Venezuela for their places in line to buy necessities of life which are in short supply:

There's a booming new profession in Venezuela: standing in line. The job usually involves starting before dawn, enduring long hours under the Caribbean sun, dodging or bribing police, and then selling a coveted spot at the front of huge shopping lines.

As Venezuela's ailing economy spawns unprecedented shortages of basic goods, panic-buying and a rush to snap up subsidized food, demand is high and the pay is reasonable. "It's boring but not a bad way to make a living," said a 23-year-old man, who only gave his first name Luis, as he held a spot near the front of a line of hundreds outside a state supermarket just after sunrise in Caracas. 

Unemployed until he tried his new career late last year, Luis earns about 600 bolivars, a whopping $95 at Venezuela's lowest official exchange rate but just $3.50 on the black market, for a spot. He can do that two or three times a day. "There's a lady coming at 8 a.m for this place. She's paid in advance," Luis said, patting his wallet despite nods of disapproval around him. "I'll have a break and then maybe start again. I chat to people to pass the time, the conversation can be fun. If it's not, I play on my phone."

Apparently, there is another variation on this practice. Another group of these folks eager to queue all day long as long as it earns them some money are more like professional grocery shoppers who wait in line to buy your orders:

Krisbell Villarroel, a 22-year-old single mother of two small children in Caracas, makes a living by queuing up to buy things she then sells to clients who pay her for the time she spends standing in line. “Every day, I have to get up at two in the morning and call my friends to find out where things are for sale or what is for sale,” Villarroel told AFP.

“That is how I spend my day. I get out of the first line at 10am and then perhaps go to another to see what they are selling,” she explained. “In one store, I might get milk, sugar or coffee, but in another – flour, rice, diapers or shampoo.” Villarroel said her customers are families who do not have the time or really the need to wait in line – business people who have their own lives and money to pay someone to do this kind of thing.

Once more, there is an analogue Stateside since there are those who purchase groceries for seniors who are not active enough to do the grocery shopping themselves. Still, that young, active Venezuelans in the prime of their years are literally being paid to waste time suggests the brokenness of their socialized economy. A lot of this nonsense could be subsidized when oil was at $120 a barrel; nowadays, what you see is what you get. 

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After Swiss Capitulation, Will Danes Keep Their Peg?

Older bills feature a homburg wearer. Should we keep faith in homburg wearers?

First off, you can discount the headline from the rather sensationalistic Daily Telegraph--bastion of economic illiteracy--that the removal of Denmark's krone (DKK) peg may cause similar effects to the disruption caused by the Swiss uncoupling the franc's value from that of the euro. From BIS figures, the Swiss franc (CHF) is the world's sixth most-traded currency in global markets--involved in 5.2% of all transactions--whereas the Danish krone's share of 0.8% is a rounding error in comparison. It's simply not one of the world's most widely traded currencies, and Denmark is not quite a global trading powerhouse despite being a very advanced country due to its size.

That said, the Danes are wading into dangerous territory by attempting to ward speculative money away through negative interest rates on short-term deposits. That is, they are trying to prevent speculators from going "long" on krones since you would actually lose money holding onto it:

Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties. “Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible.”

The comments followed yesterday’s surprise decision by the Danish central bank to cut its deposit rate by 15 basis points to minus 0.2 percent, matching a record low last seen during the darkest hours of Europe’s debt crisis in 2012. Like the Swiss, the Danes lowered rates after interventions in the market proved insufficient.

What the Daily Telegraph unsurprisingly neglects to mention [surprise!] is that the Danish authorities actually have an agreement with the ECB formalizing its longstanding peg. Unlike the Swiss authorities who are Johnny-come-latelys to the pegging sweepstakes, the Danes have been at it since the German occupation:

According to the exchange-rate agreement between Denmark and the ECB, currency interventions to defend the peg will “in principle be automatic and unlimited...” Denmark has “a long-lasting and politically firmly anchored fixed-currency policy,” [Economy Minister Morten] Oestergaard said. “This situation should not be overly dramatized.” 

On one hand, then, global consequences of the Danish krone breaking its peg to the euro from around its current level of 7.43 should be minimal (outside of Denmark). Whether it's in the interests of Danish officials to do so is another question. Sure Danish officials say their situation is different from that of Switzerland and that they will defend at all costs, but the latter reassurance was also made by the Swiss a week before their peg was broken.

My take? The Danes will attempt to tough it out--perhaps by making short-term rates even more negative in the coming days. However, if these attempts prove unsuccessful or too costly, they will remove the peg...and reset it at a somewhat lower EUR/DKK level. Like Dick Cheney and waterboarding, I believe pegging is in their blood. 

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Bleeding Forex Reserves: Russia & the 'Fragile Five'

The 90s "connected" developing countries through contagion . How about now?

Whether through coincidence or not, this article on developing countries quickly losing foreign exchange reserves from the Nikkei Asian Review--fast becoming my Asian periodical of choice after the demise of the late, lamented Far Eastern Economic Review--comes from an issue whose cover story is..."Living With Terror"[!] Having been a onetime foreign exchange trader during the height of the Asian financial crisis in a crisis-affected nation, I can sympathize with the feeling of being subject to fear-inspiring events I'd much rather avoid.

But the day of reckoning has come for these nations--again for a handful like Brazil, Indonesia, Russia and Thailand that were particularly hard-hit by the events near the turn of the millennium. There's an unmistakeable sense of deja vu for developing countries. Like in the aftermath of the Asian financial crisis, commodity exporters are taking it on the chin as the world economy slows down while the US seemingly does better. The combination of a developing world slowdown and dollar strength was bad then and is ominous now. A surefire sign of distress is of the aforementioned developing countries drawing down foreign exchange reserves to defend their currencies from further depreciation (the opposite of the Swiss situation in which excessive strength is the problem):

The foreign currency reserves of Brazil, Russia and four other big emerging countries fell 6% in the second half of 2014 from the preceding six months. The fall came as the countries' monetary authorities attempted to defend their home currencies in the foreign exchange market.

The decrease was the second largest since the 17% plunge in the latter half of 2008, when the global financial crisis led to emerging nations' currencies being dumped. The values of those currencies have been spiraling downward due to plummeting crude oil prices and increased dollar buying now that the U.S. Federal Reserve appears poised to raise interest rates.

Yet while the drawdowns on foreign exchange reserves have been substantial, so are the reserves these countries accumulated during the years after the Asian financial crisis. They feared a rehash during troubled times, and it appears the rainy days they saved for are upon us:

The total foreign reserves of Russia and the so-called fragile five -- Brazil, India, Indonesia, South Africa and Turkey -- stood at $1.36 trillion as of the end of December, down $92.8 billion in six months. The decline in the latter half of 2008 was $218.1 billion.

Russia suffered the largest decline, with a decrease of $89.7 billion, or 18%. Turkey recorded a 5% decline; Brazil also logged a slight drop. The Turkish lira and the Russian ruble plunged to record lows against the dollar in December, while the Brazilian real hit its lowest point in roughly nine years. The South African rand dropped to a roughly six-year low, the Indonesian rupiah to a 16-year low and the Indian rupee to a one-year low.

It is unlikely, however, that these six countries will run out of foreign reserves anytime soon; they have expanded these reserves by roughly 200% in the past decade. The market largely expects these countries will not spark a currency crisis or go into default -- at least not for the time being. Thailand, Indonesia, South Korea and even Russia experienced currency and foreign reserve crises in the 1990s. Monetary authorities have apparently learned a lesson from that era.

It's time to hang tough, then. Judging from their leadership, I'm relatively more sanguine about the prospects of India and Indonesia, but you never know how these things pan out.

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National Debt That's 245% of GDP? No Worries, Japan

Relaaaaax; it's not as bad as it looks for Japan?

Economics Professor Masazumi Wakatabe at Waseda University was prompted to write commentary on Japan's fiscal situation by a recent FT article calculating Japan's national debt to be a world-leading 245% of GDP. In Greece, it's a puny 176% by comparison. 245%! Why haven't financial yellow journalists been proven right in predicting Japan will be crushed by hyperinflation and other laughable nonsense? As the good professor explains, the fiscal situation in Japan is not nearly as bad as it looks.

First, consider the usual explanations concerning how the assets held by the Japanese government significantly offset its paper liabilities:

The key to understand Japan’s fiscal situation is the net debt as opposed to gross debt. First, the Japanese government holds large amount of assets, therefore the net debt relative to GDP ratio goes down to 132 percent as of June 2014.

Second, the Bank of Japan holds a large amount of Japanese government bonds. “Since the central bank could, in principle, forever hold its current stock of JGBs, the government need not worry about how it is going to repay these bonds,” [Columbia Professor David] Weinstein wrote. Then the net debt relative to GDP ratio goes even further down to 80 percent as of June 2014.

There is some sleight of hand here that won't pass muster with international standards regarding national-level bookkeeping, of course, but thankfully he doesn't reiterate the old chestnut that most Japanese government bonds (JGBs) are held by Japanese since their exceedingly low yields make them unattractive to international investors. So, Japan is not really vulnerable to a crisis of confidence among foreign holders of its debt since, well, most debt is held at home.

But wait, there's more. Updated figures suggest the situation is note even as dire as the "adjusted" figures indicate:

The Ministry of Finance has been compiling the balance sheets of the government from 2003. According to the recent figure (in Japanese. Curiously, the English version is not updated since 2003), the Japanese government owes debt of 1,269.1 trillion yen, and owns assets of 822.2 trillion yen, therefore the net debt is 447 trillion yen at the end of March, 2013. The net debt relative to GDP ratio is about 90 percent, which is lower than the Weinstein estimate.

The statistics for 2014 fiscal year is not yet released, but assuming that the net debt has increased by 5 trillion yen from 2013 to 2014, the net debt would be 452 trillion yen. As of December 31, 2014, the BOJ holds JGBs worth 254 trillion yen. If we subtract this from the net debt, the net debt relative to GDP ratio becomes 41 percent.

However, even more caution should be exercised in "magicking" Japan's debt from 245% down to 41%. For, some of the assets identified are already set aside for servicing future obligations--chiefly pensions. That said, he is still more sanguine about Japan's fiscal situation than most:

Now some might argue that the assets which the Japanese government owns are earmarked, and thus not salable. This is true for funds reserved for the pension fund worth 130 trillion yen, but the Japanese government has 41 trillion yen of cash, and 272 trillion yen of securities. The government also owns real properties in good locations. They may not be sold, but could certainly be leased to the private developers. As the real estate market in Tokyo is picking up, a lease of government properties could generate a considerable amount of revenue to the government’s coffer.

I am not saying that fiscal consolidation is not necessary. But right now, Japan faces an output gap, a difference between potential and actual GDP, of 2.8 percent. Japan faces a shortage of demand. Against this background, the budget for the 2015 fiscal year is not expansionary enough. What the public should worry about is not the fiscal situation, but the dwindling economy.

Again, I am not so sure if Japan can spend its way to prosperity and much recommend opening the country up to significantly increased migration for both increasing the pool of working-age persons and generating consumer demand. To me that is the tonic for a dwindling economy that the Japanese remain so very reluctant to address but the most likely to work since almost everything else has already been tried to little effect.

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Counting Ways the Swiss Franc Shook the World

Some folks didn't know when to fold 'em, hurting FXCM.

Less than a month into 2015, we already have a candidate for its biggest economic story for the year. Catching nearly everyone off-guard, the Swiss National Bank (SNB) indicated on Thursday (15 January) that it would no longer push down the value of the Swiss franc against the euro. You see, since 6 September 2011, the SNB had kept the Swiss franc (CHF) at 1.20 to the common currency to maintain the competitiveness of Swiss exports--especially to the Eurozone where over half of them go. The trigger of this guarantee was the CHF brutally gaining against EUR [1, 2] as the European Central Bank (ECB) started emulating American-style easy money policies in trying to reflate the Eurozone from its moribund state.

By the end of Thursday, CHF had gained nearly 40% against the euro--kind of unbelievable, but it really did happen. We all know of the massive Swiss multinationals that have loudly complained about the SNB's action given the loss of competitiveness that will surely follow: ABB in construction, Nestle in food, Hoffman-LaRoche and Novartis in pharmaceuticals, etc. The beating Swiss exporters received on stock markets on Thursday and the uncertainty this action caused for banks that were caught "short" on Swiss francs the world over walloped any number of financial service concerns and dragged global equity indices down.

However, there is also a long list of victims of the SNB move that are somewhat less obvious. Nothing is for certain, and mistaking something temporary--albeit long-lasting--as permanent gives rise to all forms of financial distress when the self-inflicted delusion is revealed. In order of culpability, these include:

(1) Eastern Europeans who took out home loans denominated in CHF:

Eastern European currencies tumbled and banking stocks slumped after Switzerland’s move to allow its currency to appreciate stoked concern individuals will struggle to repay loans denominated in Swiss francs. Poland’s zloty weakened 15 percent to 4.1533 against the the Swiss currency by 5:56 p.m. in Warsaw, paring an earlier loss of as much as 28 percent. Hungary’s forint and the Romanian leu tumbled to records. Warsaw-listed Getin Noble Bank SA sank 16 percent, while Bank Millennium SA and PKO Bank Polski SA, the country’s biggest lender, slid at least 6.5 percent.

The Swiss National Bank’s unexpected decision to scrap its minimum exchange rate is threatening to spur a rise in bad debt as the move raises the cost of paying off loans in francs, including mortgages. Many Poles and Hungarians opted to borrow in francs in the run-up to the 2008 financial crisis because loan rates were lower than for local currencies. Their payments increased as the franc appreciated against the zloty, forint and leu in all but one of the past five years.

“Massive Swiss franc appreciation is extremely bad news for foreign-currency borrowers in central Europe,” Michal Dybula, an economist at BNP Paribas SA in Warsaw, said in an e-mailed note. “It will make servicing franc loans more expensive, reducing disposable income and hurting consumption. That’s bad news for growth and the banking sector as the non-performing ratio of Swiss franc mortgages is likely to increase.”

(2) One of the world's largest online foreign exchange brokers, FXCM:

Retail foreign exchange broker FXCM got a $300 million bailout on Friday after taking huge losses on the Swiss National Bank's (SNB) shock decision to drop its three-year-old peg of 1.20 Swiss francs per euro.

Leucadia National invested $300 million cash in FXCM in exchange for a $300 million senior secured term loan with a two-year term and a 10 percent coupon. If FXCM is sold Leucadia will get a portion of the proceeds. FXCM shares plunged more than 70 percent in afterhours trading Friday. The stock was halted for the entirety of the regular session.

To make a long story short,  FXCM had to cover margin calls for clients considerably in excess of their account equity, causing losses for the broker itself. In other words, it loaned money for clients to gamble against the Swiss franc with, and this magnified their losses when the CHF strengthened. Meanwhile, FXCM held the bag in compensating counterparties for losing bets its customers made against the Swiss franc.

(3) And perhaps the most obvious of them all, a large hedge fund that was reportedly shorting Swiss francs:

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm.

Everest Capital’s Global Fund had about $830 million in assets as of the end of December, according to a client report. The Miami-based firm, which specializes in emerging markets, still manages seven funds with about $2.2 billion in assets. The global fund, the firm’s oldest, was betting the Swiss franc would decline, said the person, who asked not to be named because the information is private.

The stereotype most have of the Swiss is of rather staid people. Ever been to Geneva? Whoever thought that it would be the Swiss who would drop this kind of bombshell on the world economy so early in 2015? A happy new year it is not for any number of folks embroiled in forex shenanigans involving the Swiss franc.

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Strongman's Strongman: 30 Years of Cambodia's Hun Sen

He traded a walk-on part in the war for a [30-year] lead role in a [Cambodian] cage.

This year marks the thirtieth that Hun Sen has been the prime minister of Cambodia. He is the sixth-longest tenured world leader after, er, Robert Mugabe of Zimbabwe. There have been  (count 'em!) 33 that preceded him, but once he assumed office, he's held on no matter what. For what it's worth, he sought refuge in Vietnam at the height of the Khmer Rouge and subsequently returned to oust those murderous folks. The Khmer Rouge were undoubtedly brutal, killing at least 2 million of their own people in the four years they were in power. For helping oust the Khmer Rouge, all civilized people the world over owe a debt of gratitude to Hun Sen.* However, there remains a fairly huge asterisk on this claim since Hun Sen himself has not been a particularly savory leader in the aftermath.

To commemorate thirty years of Hun Sen in power, Human Rights Watch came out with a scathing indictment of his (mis)rule:

The 67-page report, “30 Years of Hun Sen: Violence, Repression, and Corruption in Cambodia,” chronicles Hun Sen’s career from being a Khmer Rouge commander in the 1970s to his present role as prime minister and head of the ruling Cambodian People’s Party (CPP). The report details the violence, repression, and corruption that have characterized his rule under successive governments since 1985.

Hun Sen has ruled through violence and fear. He has often described politics as a struggle to the death between him and all those who dare to defy him. For example, on June 18, 2005, he warned political opponents whom he accused of being “rebels” that “they should prepare coffins and say their wills to their wives.” This occurred shortly after he declared that Cambodia’s former king, Norodom Sihanouk, who abdicated to express his opposition to Hun Sen’s method of governing, would be better off dead.

In a speech on August 5, 2009, he mimicked the triggering of a gun while warning critics not to use the word “dictatorship” to describe his rule. On January 20, 2011, responding to the suggestion that he should be worried about the overthrow of a dictator in Tunisia at the time of the “Arab Spring,” Hun Sen lashed out: “I not only weaken the opposition, I’m going to make them dead ... and if anyone is strong enough to try to hold a demonstration, I will beat all those dogs and put them in a cage.”

So Hun Sen is not a cuddly guy; us Southeast Asians kind of figured that out early on in his tenure. I am not exactly contesting HRW's claims that he's done some fairly nasty things over the years. That said, there are extenuating circumstances. Would the same national political circumstances that gave risk to the Khmer Rouge become all lovey-dovey afterwards? Hun Sen's contention has always been that you need to be tough to survive as Cambodia's leader. Recently:

In a speech marking the ceremonial completion of the country's longest, 2,200-metre Japanese-funded bridge across the Mekong River yesterday, the 62-year-old Hun Sen defended his record, saying that only he was daring enough to tackle the Khmer Rouge and help bring peace to Cambodia.

"If Hun Sen hadn't been willing to enter the tigers' den, how could we have caught the tigers?" he said. He acknowledged some shortcomings, but pleaded for observers to see the good as well as the bad in his leadership.

It's a fair point way back when, although you have to question whether Cambodian  development has been hamstrung by having Hun Sen in power for so long. He's been adaptable to shifting political tides: allying with Vietnam to dislocate the Khmer Rouge but moving closer to China afterwards as the latter grew in power. His viciousness is reflected in the United Nations power-sharing agreement struck with Cambodia's royalty, which prompted him to dispose of Prince Ranariddh shortly thereafter. The aftermath wasn't pretty:

A U.N. report in August 1997 confirmed summary political executions of 41 opponents to Mr. Hun Sen, including Interior Ministry Secretary of State Ho Sok, who was killed inside his ministry. In a November 1997 BBC documentary, Mr. Hun Sen laughed off the damning U.N. findings. “There are probably no more than 50 people in Cambodia who have read the report. There are 11 million people in Cambodia. They don’t understand what the human rights report is about,” he said.

“What the U.N. says doesn’t bother me. The problem is my people and whether they support me.” The U.N.’s human rights office in Phnom Penh reported a further 16 political killings in the two months before the July 1998 national election, which the CPP won, legitimizing Mr. Hun Sen’s power and allowing him to return as Cambodia’s sole prime minister...Asked in 1998 what the U.N. had given Cambodia five years before, Mr. Hun Sen said “AIDS.”

The point about support from the international community being secondary to domestic support well taken. Ultimately, Hun Sen is the strongman's strongman--a canny political operator in Cambodia's literally murderous environment. There is a case to be made reminiscent of any number of Middle Eastern countries that have gotten rid of their longtime leaders: So you can get rid of strongmen with the tacit approval of the West, but will these countries be any better off afterwards? This is not always the case as any number of Middle Eastern countries have demonstrated.

How long would a soft-in-the-middle democracy lover last in Cambodia? I guess with Hun Sen still around, we will not really know the answer for quite some time for better or worse.

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