Relevant and even prescient commentary on news, politics and the economy.

Why Did Oil Prices Plunge This Black Friday?

Why Did Oil Prices Plunge This Black Friday?

Nothing to do with the American super big shopping day after Thanksgiving, but several items, some of which may reverse themselves.  As it is, it was a pretty big drop, nearly 5 percent for the day for both West Texas and Brent crude, with the latter now just above $60 per barrel.

The big headline is the resignation of Iraqi prime minister Adil Abdul Mahdi. The immediate trigger of that was that it was demanded by Iraq’s most influential cleric, Ali Sistani.  This came after weeks of mounting protests in Iraq against the government, both in Baghdad, but also among Shia in the South, with Sistani a Shia cleric. He is based in Najaf, the Shia holy city where Imam Ali is buried, the son-in-law of the Prrophet Muhammed.  Protestors had just torched an Iranian consulate there. The supposed reason this might justify a fall in oil prices is that it is thought that the protests have reduced exports from Iraq, which is currently the second largest oil exporter in OPEC. I do  not know if that will result, but if indeed this leads to Iraqi oil exports rising, then indeed a price drop is justified.

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The consumer is still alright, November 2019 edition

by New Deal democrat

The consumer is still alright, November 2019 edition

I have a new post up at Seeking Alpha.

A few months ago I took a look at the order in which I would expect the dominoes to fall if there were to be a consumer-led recession. One more domino has fallen, but several important ones are still upright.

As usual, clicking over and reading puts a couple of pennies in my pocket, and should be educational for you.

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Complicating The ARAMCO IPO

Complicating The ARAMCO IPO

The Saudi ARAMCO IPO is happening on the Saudi exchange just for Saudi citizens, where apparently there is a not-so-subtle campaign on well off and connected citizens (who wish to remain that way) to buy into the IPO.  But there continues to be delays in opening it up to the rest of the world, with this partly reflecting fears of demands that might be made for more openness, and all that, with various Saudis not keen on that, especially apparently at ARAMCO itself.

However there are now reports of another development that might encourage domestic purchases but may further put off foreigners.  This is a nw round of arrests of alleged dissidents, up to at least nine in the last week.  These are all fairly prominents leading citizens, a philosopher, journalists, businessmen.  What is curious and disturbing about this round is that badically all of these have reportedly been supportive of the regime and of the recent initiatives, at least the economic ones, by MbS, the Crown Prince.  But they are being swept up?  Why?  Apparently the only thing that at least some of them have in common is that back in 2011 many of them (not clear all of them) made public statements sympathetic to the initial Araab Spring uprisings, a position never shared by the Saudi government.  The theory is that thanks to Trump’s support and the apparent end of the mild disapproval  by many foreigners after the murder of WaPo columnist, Jamal Khashoggi, MbS feels he can get away with clearing out even potential critics.

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Housing rebound continues; price appreciation stabilizes

Housing rebound continues; price appreciation stabilizes

Just a quick note, as I am traveling today.New home sales declined slightly in October from September, but remain at the high end of this expansion. The renewed uptrend in housing sales, due to lower mortgage rates, is clearly intact:

Meanwhile house prices, as measured by the Case Shiller index, also increased at a slightly faster YoY rate, 3.2% for September vs. 3.1% in August (blue):

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Rebound in existing home sales continues, but beware the housing “choke collar”

Rebound in existing home sales continues, but beware the housing “choke collar”

Although they account for about 90% of the entire housing market, existing home sales are the least consequential to the economy. That’s because building new homes entails a bunch of economic activity, from architects, builders, building trades contractors, landscapers in the building process, followed by furniture, appliances, and yard improvements after the owners move in. Existing home sales on average have very little of the former, and much less of the latter.

But because existing homes compete with new homes for living space, it’s worthwhile to note that they confirm what we’ve been seeing in new home sales and construction this year; namely, a recovery brought about by lower interest rates.

The NAR doesn’t permit FRED to post its data. So here is a graph of existing home sales for the past twenty years from Dshort.com:

For my purposes, you can ignore the blue, “population-adjusted” line. Note the significant declines in sales following the rise in interest rates in the second half of 2013 and again in 2018. The low point was this past January. There is a well-established uptrend in place since then – which is the same thing we see with new houses, which also bottomed earlier this year.

 

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Have the Transfer Pricing Experts at KPMG Heard of the Repo Ruckus?

Have the Transfer Pricing Experts at KPMG Heard of the Repo Ruckus?

If one thinks Trump’s economic advisors are the dumbest people on the planet, I have a new candidate for that award – a few supposed experts on intercompany loans that work for KPMG:

In 2017, the ARRC selected the Secured Overnight Financing Rate (SOFR) as the alternative that represents the best replacement rate for USD-denominated LIBOR. SOFR is based on overnight transactions in the U.S. dollar Treasury repo market, the largest rates market at a given maturity in the world … In the time since the Federal Reserve Bank of New York began daily publication of SOFR in 2018, significant progress has been made in building liquidity in SOFR-linked markets (which include dollar-based derivatives and loans) … SOFR is fundamentally different than LIBOR in a number of key elements. SOFR is (currently) an overnight rate, is secured and is designed to reflect a (virtually) risk-free rate. LIBOR has forward-looking term options, is unsecured and is designed to reflect a bank’s cost of funding. All of these characteristics factor into how SOFR will perform under certain circumstances and how it can be used by market participations. For example, the following figure compares 3-month LIBOR, one the most commonly used LIBOR benchmarks, to the 3-month simple average of SOFR. SOFR is generally both lower and, depending on the methodology applied to derive a term structure, less volatile as compared with LIBOR. This is to be expected given the lower risk profile of SOFR, since it represents borrowings collateralized by U.S. Treasury securities while LIBOR reflects interbank credit risk.

The purpose of their ramblings was to advise multinationals on what to do with a set of their intercompany loans once LIBOR disappears, which is sort of making an easy issue hard so their arrogant and overpriced clowns can charge lots of fees for virtually nothing. But hey – that is what the Big Four does.

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Real decentralization is radical

by David Zetland  (originally published at One handed economist)

Real decentralization is radical

Visionaries, consultants and public speakers love to explain how they are embracing distribution over decentralization over centralization, using an image like this:

Figure 1

What drives me crazy about this image is that it actually undersells true decentralization, i.e., when everyone is connected to everyone:

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Plastic: Part of the Problem . . . Part of the Solution – Part 4: Efficient Use of Recyclates

The problem of plastic waste seems insurmountable. The good news is plastic recycling is on the rise and that is good for the circular economy. In parts 1, 2 and 3, we delved into the role of the waste management and recycling industry and how material sorting technologies can help. Part 4 is all about the increased use of recyclates as an essential part of properly closing the plastic cycle.

The plastics industry is facing a great many challenges. Harvesting recyclates from waste is only worthwhile if the plastic has been properly sorted and does not contain any metal, and if the products made from the secondary raw material are similar in quality to those made from new plastic.

Manufacturing recyclates from plastic waste is the first step. But in order to fully close the plastic cycle, more recyclates need to be used in the manufacturing of new products. This is a lucrative business for plastics processors, as recyclates are cheaper than new materials.

With material costs in the plastics industry accounting for 40% to 80% of total expense, depending on the segment, using recycled materials can significantly increase profitability. In addition, the secondary raw material in its ultra-pure state has practically the same characteristics as new plastic.

Yet there are still a number reservations in the industry when it comes to recyclates. The quality of the input material is particularly important in this regard. Recyclates must be free from any contamination to protect processes and machines from damage and ensure that the final products meet high standards of quality.

Survey on the Use of Recyclates by Processers on the Leap

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Russ Roberts and The Rat Hole Fallacy

by Eric Kramer

Russ Roberts and The Rat Hole Fallacy

Liberals believe that unregulated markets do not adequately supply public goods like roads, parks, and scientific research, and that government should use its taxing and spending powers to provide these goods.  Conservatives agree that markets fail to provide ideal quantities of public goods, but they emphasize that government spending is often wasteful and inefficient, and they argue that waste and inefficiency justifies limiting government spending.  Market failure is real a problem, but so is government failure, and nothing is gained by shoveling tax dollars down a rat hole.

The belief that government inefficiency justifies reducing the size of government is one of the most common and influential arguments for limited government.  Here is a version of this argument being made by Russ Roberts in a recent episode of his EconTalk podcast:

I have no problem with government taxing at relatively high rates if I thought they would spend the money well . . . I oppose high tax rates not because of market inefficiencies or slowing of rates of growth. Because I don’t think that government allocates that money well. And I think that argument–again, it’s not much of a winner [politically] –but that’s the right way, I think, to think about those things.

The point Roberts is making is intuitively plausible.  The idea that government waste justifies spending cuts is also emotionally appealing, because people deeply resent the idea that their tax money is misspent by incompetent or corrupt public officials.  Not surprisingly, the belief that government is wasteful reduces public support for government programs.  But the claim that government inefficiency justifies limited government is a fallacy.  We can call it the Rat Hole Fallacy.

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Plastic: Part of the Problem . . . Part of the Solution – Part 3: Sorting Technology

As I mentioned, this 4 part presentation is being done by Sesotec GmbH, a company which manufactures recycling equipment. Even so the information given by Sesotec is to the point on the topic of pollution by man made packaging and products which can be sued again and again and in some cases up to 8 times. Fair warning as the pitch comes with regards to Sesotec’s abilities.

Around 70 years after the first plastic product hit the market, a world without plastic waste now seems like a distant vision. It’s time for a new perspective on this supposed waste. In the third instalment of our series, we focus on how we must all manage how we deal with plastics in future, and the role materials sorting technologies and contaminant detection systems play in recycling.

Each year, Europeans generate 25 million tonnes of plastic waste. At a global level, 78 million tonnes of plastic waste is created annually. The world has to respond to this global problem together, as recycling rates everywhere have been at a low level so far: 30% in Europe, 25% in China, and just 9% in the USA (Plastikmüll-Statistik 2017). A large portion of the supposed waste is still incinerated, or ends up in landfills and the environment, which harbors risks for our water, air, and food chain.

To achieve a Circular Economy, it’s important that all players contribute to this task: from product design and manufacture on the part of the plastics industry, along with conscious use and avoidance of plastics as well as waste separation on the part of consumers, followed by proper recycling and sorting by the waste and recycling sector, all the way up to conversion into high-quality secondary raw materials and their use in the manufacture of new products.

Past the leap, how a Circular Economy will work.

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