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Martin Wolf of FT warns of need for Deleveraging (and more), from Peter Myers | ODS

(1) Martin Wolf of FT warns of need for deleveraging: forced conversion debt to equity

(2) Commodities crash to cause corporate bankruptcies in the Oil and Gas sector

(3) Oil Prices should be going up, not down - F. William Engdahl
(1) Martin Wolf of FT warns of need for deleveraging: forced conversion debt to equity
{Martin Wolf is canvassing a need for Debt Forgiveness. But one person's
Debt is another's Capital - Peter M.}
Why it would be wise to prepare for the next recession
Martin Wolf
Financial Times
February 4, 2016 11:49 am
It is crucial to recognise that something more unconventional might have
to be done - Mark Carney, governor of the Bank of England
What might central banks do if the next recession hit while interest
rates were still far below pre-2008 levels? As a paper from the
London-based Resolution Foundation argues, this is highly likely.
Central banks need to be prepared for this eventuality. The most
important part of such preparation is to convince the public that they
know what to do.
Today, eight-and-a-half years after the first signs of the financial
crisis, the highest short-term intervention rate applied by the Federal
Reserve, the European Central Bank, the Bank of Japan or the Bank of
England is the latter’s half a per cent, which has been in effect since
March 2009 and with no rise in sight. The ECB and the BoJ are even using
negative rates, the latter after more than 20 years of short-term rates
of 0.5 per cent, or less. The plight of the UK might not be that dire.
Nevertheless, the latest market expectations imply a base rate of
roughly 1.6 per cent in 2021 and around 2.5 per cent in 2025 — less than
half as high as in 2007.
What are the chances of a significant recession in the UK before 2025?
Very high indeed. The same surely applies to the US, eurozone and Japan.
Indeed, the imbalances within the Chinese economy, plus difficulties in
many emerging economies, make this a risk now. The high-income economies
are likely to hit a recession with much less room for conventional
monetary loosening than before previous recessions.
What would then be the options?
One would be to do nothing. Many would call for the cleansing depression
they believe the world needs. Personally, I find this idea crazy, given
the damage it would do to the social fabric.
A second possibility would be to change targets, possibly to ones for
growth or level of nominal gross domestic product or to a higher
inflation rate. It would probably have been wise to have had a higher
inflation target. But changing it when central banks are unable to
deliver today’s lower target might destabilise expectations without
improving outcomes. Moreover, without effective instruments a more
ambitious target might just seem empty bombast. So the third possibility
is either to change instruments or to use the existing ones more powerfully.
One instrument, not much discussed, would be to organise the
deleveraging of economies. This might need forced conversion of debt
into equity. But, while desirable in extreme circumstances, this would
be practically difficult.
Another would be a still bigger scale of quantitative easing. At the end
of the third quarter of last year, the BoJ’s balance sheet was 70 per
cent of GDP, against less than 30 per cent for the Fed, the ECB and the
BoE. The latter three could follow the former. Moreover, the assets they
buy could be broadened, one possibility being foreign-currency bonds.
But that would be provocative and unnecessary. The BoJ and ECB have
engineered big currency depreciation without making it quite so blatant.
Yet another instrument is negative interest rates, now used by the ECB,
the BoJ and the central banks of Denmark, Sweden and Switzerland. With
clever gimmicks, it is possible to impose negative rates on bank
reserves at the margin, thereby generating negative interest rates in
markets, without imposing negative rates on depositors. How far this can
be pushed while cash is still an alternative is unclear. Beyond a
certain point, people seek to move into cash-backed warehouse receipts,
unless a penal tax were imposed on withdrawal from banks or cash were
abolished altogether. Moreover, it is unclear how economically effective
negative rates would be, apart from lowering the currency.
A final instrument is "helicopter money" — permanent monetary emission
for the purpose of promoting purchases of goods and services either by
the government or by households. From a monetary point of view, this is
the equivalent of intentionally permanent QE. Of course, actual QE might
become permanent after the event: that is now likely in Japan. Again,
supposedly permanent monetary emission might turn out to have been
temporary, after the event. But if the money went directly into
additional spending by government or into lower taxes or to people’s
bank accounts, it would surely have an effect. The crucial point is to
leave control over the quantity to be emitted to central banks as part
of their monetary remit.
Personally, I would prefer the last instrument. But at this stage it is
crucial to recognise the great likelihood that something even more
unconventional might have to be done next time. So prepare the ground
beforehand. Central banks should be filling in these blanks now, not
after the next recession hits.
(2) Commodities crash to cause corporate bankruptcies in the Oil and Gas sector
Debt, defaults, and devaluations: why this market crash is like nothing
we've seen before
A pernicious cycle of collapsing commodities, corporate defaults, and
currency wars loom over the global economy. Can anything stop it from
By Mehreen Khan, graphic by Tom Shiel, Chris Newell
10:00AM GMT 06 Feb 2016
A global recession is on the way. This truism of economics holds at any
point in which the world is not in the grips of a contraction.
The real question is always when and how deep the upcoming downturn will be.
"The crash will come, but it would be nice if it came two years from
now", Thomas Thygesen, head of economics at SEB told over 200 commodity
investors and analysts in London last month.
His audience was rapt with unusual attention. They could be forgiven for
thinking the slump had not already arrived.
Commodity prices have crashed by two thirds since their peaks in 2014.
Oil has borne the brunt of the sell-off, suffering the worst price
collapse in modern history. Brent crude has fallen from $115 a barrel in
the summer of 2014, to just $27.70 in mid-January.
"They tell you should start your presentations with a joke, but making
jokes at a commodities seminar is hardly appropriate these days,"
Thygesen told his nervous audience.
Major oil price falls have a number of historical precedents. Today's
glutted oil market is often compared to the crash of 1986, the last
major episode over global over-supply. Back in the late 90s, a barrel of
Brent crude fell to as low as $10 in the wake of the Asian financial crisis.
A perfect storm
But is the current oil price collapse really like anything the world
economy has ever experienced?
For many market watchers, a confluence of factors - led by oil, but
encompassing China, the emerging world, and financial markets - are all
brewing to create a perfect storm in a global economy that has barely
come to terms with the Great Recession.
"We are in a very unusual situation where market sentiment is of a
different nature to anything we’ve seen before," says Thygesen.
Unlike previous pre-recessionary eras, the current sell-off has seen
commodity prices, equities and credit conditions all move in dangerous
The S&P 500 trading pit at the Chicago Mercantile Exchange
Although a 75pc oil price collapse should represent an unmitigated
positive for the world’s fuel thirsty consumers, the sheer scale of the
price rout is already imperiling the finances of producer nations from
Nigeria to Azerbaijan, and is now threatening to unleash a wave of
bankruptcies across corporate America.
It is the prospect of this vicious feedback loop - where low oil prices
create financial tail risks that spill over into the real economy -
which could now propel the world into a "full blown crisis" adds Thygesen.
So will it materialise?
The world economy is throwing up reasons to worry, as the globe's
largest emerging markets have shown signs of deterioration over the last
six months, says Olivier Blanchard, the former long-serving chief
economist of the International Monetary Fund.
"China’s growth is probably less than officially reported. Russia and
Brazil are doing very badly. South Africa is flirting with recession.
Even India may not be doing as well as was forecast," says Blanchard,
who left the Fund after seven years late last year.
As it stands however, he says market ructions still represent a classic
case of "herd" behaviour.
"Investors worry that other investors know something bad, and so just
sell, although they themselves have no new information."
Blanchard spent seven years firefighting the worst financial crisis in
history at the IMF
But a tipping point may well be approaching. According to Blanchard’s
calculations, a 20pc decline in stock markets that persists for more
than six months, will translate into a decline in consumption of between
0.5pc to 1.0pc.
"This would be a serious shock. My biggest fear is precisely that the
dramatic shift in mood becomes self-fulfilling".
The first domino to fall
For now, oil-induced financial stress is concentrated in the energy sector.
With Brent set to languish around $30-35 barrel for the rest of the
year, prices will persist below the $40-60 barrel break-even point that
renders the bulk of US oil and gas companies profitable.
Spreads on high yield US energy corporates have soared to unprecedented
highs. "They make Lehman look like a walk in the park" says Thygesen.
More than a third of the entire US high yield bond index is now
vulnerable to crude prices remaining low or falling even further,
according to calculations from Oxford Economics.
As a result, 2016 is set to see the first wave of corporate bankruptcies
in the oil and gas sector. Highly leveraged US shale companies will be
the first be picked off. Should escalating defaults have a further
depressant effect on oil prices, it could unleash a tidal wave of
corporate bankruptcies in the world’s largest economy.
Conditions that usually pave the way for mounting defaults are currently
met in the US Oxford Economics
Indebtedness is not just the scourge of the US. Globally, the oil and
gas industry has issued $1.4 trillion of bonds and taken out a further
$1.6 trillion in syndicated loans, driving the sector's combined debt to
$3 trillion, according to the Bank of International Settlements. They
warn of an "illusion of sustainability" that could quickly turn toxic as
the credit cycle unravels.
The question exercising the minds of economists and investors is the
extent to which this contagion could metastasize beyond the energy
sector, as banks cut off credit access, loans turn bad, and financial
conditions enter a critical tightening phase.
"Conditions that usually pave the way for mounting defaults – such as
growing bad debt, tightening monetary conditions, tightening of
corporate credit standards and volatility spikes – are currently met in
the US", says Bronka Rzepkowski at Oxford Economics.
Such levels of financial distress, more often than not, portend a global
In every instance of the US high yield spread rising above its long-term
average, a recession or financial crisis has been nigh, says Rzepkowski,
who cites 2011 as the only time the markets sent out a false signal,
lulled by the Federal Reserve’s mega quantitative easing programme.
US shale break-even prices remain closer to $60 a barrel
We are not there yet, but worryingly for market watchers, a series of
other indicators are also flashing red.
Global equity markets have endured their worst start to a year since the
dotcom crash. To paraphrase Nobel prize-winning US economist Paul
Samuelson, Wall Street has predicted nine out of the last five
recessions, but the current turbulence has an ominous precedent.
Over the last 45 years, the S&P500 has suffered a loss of more than
12.5pc on 13 occasions. Six of these have given way to a recession in
the US, providing a near 50pc probability that a global downturn is just
around the corner.
In Europe, stocks have now fallen by 10pc in the last six months.
"Of the 14 previous occasions equities have had a similar decline, seven
have been associated with recession, with lacklustre returns
thereafter," says Dennis Jose at Barclays.
He notes investors have begun to pile into "defensive" stocks, such as
healthcare and consumer industries.
"The weighting in defensives has increased to the highest levels seen
since 1980 suggesting that investors may have already embraced the risk
of a recession."
Dollar danger
Macroeconomic indicators from the world’s largest economy are also
beginning to turn sour. The US has already fallen prey to a
manufacturing collapse. Service sector data for December showed the
slowdown is spreading to the dominant driver of economic growth.
"The shine has come off the US", says David Folkerts-Landau, chief
economist at Deutsche Bank.
He notes the economy is "firing on one cylinder" with consumers the sole
bright spot in an environment of still weak capital investment, and a
crippling exchange rate that is hurting exporters and squeezing
corporate profits.
"It is not a very healthy situation," says Folkerts-Landau, who
forecasts US growth will fall below 2pc this year. "That is a precarious
A crucial part of the story has been the relentless appreciation of the
US dollar. The greenback has risen by more than 22pc on a trade weighted
basis since mid-2014.
The effects have been felt far beyond the US. The soaring dollar has put
record pressure on China’s exchange rate peg, forcing Beijing to burn
through its reserves with interventions amounting to $140bn-a-month in
December to protect the renminbi.
Meanwhile, China’s capital outflows have accelerated to $676bn,
according to the Institute of International Finance.
This policy bind - known as the "Impossible Trinity" of managing a fixed
exchange rate, maintaining independent monetary policy, and a open
capital account - means a devaluation of some magnitude is all but
"It will definitely be in the double digits", says Folkerts-Landau. "We
will be lucky if the depreciation will be in the lower double-digits by
the end of the year."
"Once you anticipate that, and you are sitting in Indonesia or Latin
America, it has an immediate impact on how you think about the world".
A weaker renminbi would unleash a new wave of deflation in an already
fragile global environment, and hasten the pressure on emerging market
exchange rates as the world’s currency wars would renew apace.
Federal reverse?
What, if anything, could halt this pernicious cycle of events from
In the short-term, analysts are unanimous: all eyes are on the US
Federal Reserve. The central bank’s first rate hike in seven years last
December has come to look frighteningly premature in the space of just
eight weeks.
I have no doubt that the Fed would expand QE Olivier Blanchard
Events have forced the Fed’s policymakers to take to the airwaves and
soothe fears that another four rate hikes are on the way this year. It
is a welcome sign for jittery markets, but may not be enough to convince
them that the Fed will be nimble enough to reverse course and begin
easing should financial conditions worsen.
Others, like Blanchard, are more sanguine about the ability of central
banks to ride to the rescue again.
"I have no doubt that, if there was such a decrease in consumption, or
if the strong dollar proved to affect net exports more than is forecast,
or any other adverse event for that matter, the Fed would wait to do
further increases" he says.
"And if things got really bad, I have no doubt that the Fed would expand
Oil prices meanwhile are widely expected to rebound from their depths by
the second half of the year, as dwindling investment and the buckling of
the vulnerable shale players begins to bite on production levels.
This in itself presents its own set of challenges. The lower oil prices
fall, the faster buyers are expected to flood back in, with violent
upward movements already in evidence over the last ten days.
In the longer term, even the postponement of the next global recession
will do little to assuage fears that world could find itself defenceless
against another round of mania, panics or crashes.
Two of the world's three major central banks have slashed interest rates
in to negative territory. Monetary tools will need to be deployed more
creatively, perhaps going as far as injecting stimulus directly into the
veins of the economy.
Should the world manage to ride out the perfect storm of 2016, next time
round, answers will be difficult to find.
(3) Oil Prices should be going up, not down - F. William Engdahl
From: Paul de Burgh-Day <>
Date: Thu, 28 Jan 2016 21:18:45 +1100
Subject: F. William Engdahl: What’s Really Going o n With Oil?
What’s Really Going on With Oil?
By F. William Engdahl
January 27, 2016
If there is any single price of any commodity that determines the growth
or slowdown of our economy, it is the price of crude oil. Too many
things don’t calculate today in regard to the dramatic fall in the world
oil price. In June 2014 major oil traded at $103 a barrel. With some
experience following the geopolitics of oil and oil markets, I smell a
big skunk. Let me share some things that for me don’t add up.
On January 15 the US benchmark oil price, WTI (West Texas Intermediate),
closed trading at $29, the lowest since 2004. True, there’s a glut of at
least some 1 million barrels a day overproduction in the world and
that’s been the case for over a year.
True, the lifting of Iran sanctions will bring new oil on to a glutted
market, adding to the downward price pressure of the present market.
However, days before US and EU sanctions were lifted on Iran on January
17, Seyyid Mohsen Ghamsari, the head of international affairs at
National Iranian Oil Company stated that Iran, "…will try to enter the
market in a way to make sure the boosted production will not cause a
further drop in prices…We will be producing as much as the market can
absorb."  So the new entry of Iran post-sanctions onto world oil markets
is not the cause for the sharp oil fall since January 1.
Also not true is that oil import demand from China has collapsed with a
supposed collapse of China’s economy. In the year to November 2015 China
imported more, significantly more, 8.9% more, year on year, to 6.6
million barrels a day to become the world’s
largest oil importer.
Add to the boiling cauldron that constitutes today’s world oil market
the political risk that has been building dramatically since September,
2015 and the Russian decision to come to the call of Syria’s
legitimately elected President, Bashar al Assad with formidable
airstrikes against terrorist infrastructure. Add as well the dramatic
break in relations between Recep Tayyip Erdog?an’s Turkey and Moscow
since Turkey, a NATO member, committed a brazen act of war by shooting
down a Russian fighter jet over Syrian airspace. All of this would
suggest prices of oil should be going up, not down.
Saudi’s Strategic Eastern Province
Then, for good measure, throw in the insanely provocative decision by
Saudi Defense Minister and de facto king, Prince Mohammed bin Salman, to
execute Sheikh Nimr al-Nimr, a Saudi citizen. Al-Nimr, a respected
Shi’ite religious leader was charged with terrorism for calling in 2011
for more rights for Saudi Shi’ites. There are approximately 8 million
Saudi Muslims loyal to Shi’ite teachings rather that the ultra-strict
Wahhabi Sunni strain. His crime was to support protests calling for more
rights for the oppressed Shia minority, perhaps some 25% of the Saudi
population. The Shi’ite population of Saudis is overwhelmingly
concentrated in the Kingdom’s Eastern Province.
The Eastern Province of the Kingdom of Saudi Arabia is perhaps the most
valuable piece of real estate on the planet, double the area of the
Federal Republic of Germany but with a mere 4 million people. Saudi
Aramco, the state-owned oil company is based in Dhahran in the Eastern
The main Saudi oil and gas fields are mostly in the Eastern Province,
onshore and offshore, including the world’s largest oil field, Ghawar.
Petroleum from the Saudi fields, including Ghawar, is shipped to dozens
of countries from the oil port terminal of the the Ras Tanura complex,
the world’s biggest crude oil terminal. Some 80% of the near 10 million
barrels of oil a day pumped out by Saudi goes to Ras Tanura in the
Persian Gulf where it is loaded on to supertankers bound for the
The Eastern Province is also home to Saudi Aramco’s Abqaiq Plants
facility, their biggest oil processing and crude stabilization facility
with a capacity of 7 million barrels per day. It’s the primary oil
processing site for Arabian extra light and Arabian light crude oils,
and handles crude oil pumped from
<> Ghawar
And it also happens that the majority of oil field and refinery blue
collar workers in of the Eastern Province are…Shi’ite. They are said
also to be sympathetic to the just-executed Shia cleric, Sheikh Nimr
al-Nimr. In the late 1980’s the Saudi Hezbollah Al-Hejaz, led several
attacks on oil infrastructure and also murdered Saudi diplomats. They
were allegedly trained in Iran.
And now there is a new destabilizing element to add to the political
tensions building between Saudi Arabia and Erdogan’s Turkey on the one
side, flanked by servile Arab Gulf Cooperation Council states, and on
the other Assad’s Syria, Iraq with a 60% Shi’ite population and
neighboring Iran, aided presently militarily by Russia. Reports are that
the instable 30-year old Prince bin Salman is about to be named King.
On January 13, the Gulf Institute, a Middle East think tank, in an
exclusive report, wrote that 80-year old Saudi King Salman Al-Saud plans
to abdicate his throne and install his son Mohammed as king. They report
that the present King "has been making the rounds visiting his brothers
seeking support for the move that will also remove the current crown
prince and American favorite, the hardline Mohammed bin Naif, from his
positions as the crown prince and the minister of interior. According to
sources familiar with the proceedings, Salman told his brothers that the
stability of the Saudi monarchy requires a change of the succession from
lateral or diagonal lines to a vertical order under which the king hands
power to his most
eligible son."
On December 3, 2015, the German BND intelligence service leaked a memo
to the press warning of the increasing power being acquired by Prince
Salman, someone they characterized as unpredictable and emotional.
Citing the kingdom’s involvement in Syria, Lebanon, Bahrain, Iraq and
Yemen, the BND stated, referring to Prince Salman, "The previous
cautious diplomatic stance of older leaders within the royal family is
being replaced by a new impulsive policy of
Yet oil prices fall?
The ominous element in this more than ominous situation revolving around
the center of world petroleum and natural gas reserves, the Middle East,
is the fact that in the recent weeks oil prices, which had temporarily
stabilized at an already low $40 range in December, now have plunged
another 25% to around $29, outlook grim. Citigroup has forecast $20 oil
is possible. Goldman Sachs recently came out saying that it may take
lows of $20 a barrel to restabilize world oil markets and get rid of the
glut of
Now I have a strong gut feeling that there is something very big, very
dramatic building in world oil markets over the coming several months,
something most of the world doesn’t expect.
The last time Goldman Sachs and their Wall Street cronies made a
dramatic prediction in oil prices was in summer 2008. At that time, amid
the growing pressures on Wall Street banks of the spreading US sub-prime
real estate meltdown, just before the Lehman Brothers collapse of
September that year, Goldman Sachs wrote that oil was headed for $200 a
barrel. It had just hit a high of $147. At that time I wrote an analysis
saying just the opposite was likely, based on the fact that there was a
huge oversupply in world oil markets that curiously, was only being
identified by Lehman Brothers. I was told by an informed Chinese source
that Wall Street banks like JP Morgan Chase were hyping the $200 price
to convince Air China and other big China state oil buyers to buy every
drop of oil at $147 it could before it hit $200, an advice that fed the
rising price.
Then by December, 2008 the Brent benchmark oil price was down to $47 a
barrel. The Lehman Crisis, a deliberate political decision of US
Treasury Secretary a former Goldman Sachs chairman, Henry Paulsen, in
September 2008, plunged the world into financial crisis and deep
recession in the meantime. Did Paulsen’s cronies at Goldman Sachs and
other key Wall Street mega-banks such as Citigroup or JP Morgan Chase
know in advance that Paulsen was planning the Lehman crisis to force
Congress to give him carte blanche bailout powers with the unprecedented
TARP funds of $700 billion? In the event, Goldman Sachs and friends
reportedly made a gigantic profit betting against their own $200
predictions using leveraged derivatives in oil futures.
Killing the shale oil ‘cowboys’ first
Today the US shale oil industry, the largest source of risíng US oil
output since 2009 or so, is hanging by its fingernails on the edge of a
cliff of massive bankruptcies. In recent months shale oil production has
barely begun to decline, some 93,000 barrels in November, 2015.
The Big Oil cartel–ExxonMobil, Chevron, BP and Shell–began dumping their
shale leases onto the market two years ago. The shale oil industry in
the US today is dominated by what BP or Exxon refer to as "the cowboys,"
mid-sized aggressive oil companies, not the majors. Wall Street banks
like JP Morgan Chase or Citigroup who historically finance Big Oil, as
well as Big Oil itself, clearly would shed no tears at this point were
the shale boom to bust, leaving them again in control of the world’s
most important market. The financial institutions who lent hundreds of
billions of dollars to the shale "cowboys" in the past five years have
their next semi-annual loan review in April. With prices hovering at or
near the $20 range, we can expect a new, far more serious wave of actual
shale oil company bankruptcies. Unconventional oil, including Canada’s
huge Alberta Tar Sands oil will soon be a thing of the past, if so.
That alone will not restore oil to the $70-90 levels that the big oil
industry players and their Wall Street banks would find comfortable. The
glut coming out of the Middle East from Saudi Arabia and her Gulf Arab
allies has to be dramatically cut. Yet Saudis show no sign of doing so.
This is what disturbs me about the entire picture.
Is something very ugly brewing in the Persian Gulf that will
dramatically push oil prices up later this year? Is a real shooting war
between Shi’ite and Saudi Wahhabi oil states brewing? Until now it has
been a proxy war in Syria primarily. Since the execution of the Shi’ite
cleric and Iranian storming of the Saudi Embassy in Teheran, leading to
a break in diplomatic ties by Saudi and other Sunni Gulf Arab states,
the confrontation has become far more direct. Dr. Hossein Askari, former
adviser to the Saudi Finance Ministry, stated, "If there is a war
confronting Iran and Saudi Arabia, oil could overnight go to above $250,
but decline back down to the $100 level. If they attack each other’s
loading facilities, then we could see oil spike to over $500 and stay
around there for some time depending on the extent of the
Everything tells me that the world is in for another big oil shock. It
seems it’s almost always about oil. As Henry Kissinger reportedly said
back during another oil shock in the mid-1970’s when Europe and the US
faced an OPEC oil embargo and long lines at the gas pumps, "If you
control the oil, you control entire nations." That obsession with
control is rapidly destroying our civilization. It’s time to focus on
peace and development, not on competing to be the biggest oil mogul on
the planet.
F. William Engdahl is strategic risk consultant and lecturer, he holds a
degree in politics from Princeton University and is a best-selling
author on oil and geopolitics, exclusively for the online magazine
<> "New Eastern Outlook".
Peter Myers