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Nick Hodge – Peak Oil: It’s Baaaack – PRN.fm – PRN.fm

Nick Hodge – Peak Oil: It’s Baaaack – PRN.fm – PRN.fm.

Nick Hodge – Peak Oil: It’s Baaaack

Posted on: March 19th, 2014

Over the past few months, I’ve been sharing my concerns about shale oil.

Namely, that it’s more comparable to a Ponzi scheme than any sort of boom.

I’ve articulated the reasons for my thesis, including fast decline rates, the amount of new rigs and wells needed, and a cost of production that’s been higher than the price of sale for some time now.

I’ve also shared recent evidence that this theory is proving correct, from horrid earnings reports — citing the reasons I just mentioned — for oil majors across the board to the fact that mainstream media outlets are starting to put the dots together, running stories like:

“Big Oil Companies Struggle to Justify Soaring Project Costs” —Wall Street Journal

“Dream of U.S. Oil Independence Slams Against Shale Costs” — Bloomberg

“Why America’s Shale Boom Could End Sooner Than You Think” —Forbes

“What Happens When The Shale Boom Ends?” — Christian Science Monitor

After my last article on the subject, I got an email from a sophisticated investor-friend of mine worth hundreds of millions of dollars — some even say a billion. His subject line was: “Awesome Article on Shale.” Here’s what he had to say:

Read More

Nick Hodge – Peak Oil: It's Baaaack – PRN.fm – PRN.fm

Nick Hodge – Peak Oil: It’s Baaaack – PRN.fm – PRN.fm.

Nick Hodge – Peak Oil: It’s Baaaack

Posted on: March 19th, 2014

Over the past few months, I’ve been sharing my concerns about shale oil.

Namely, that it’s more comparable to a Ponzi scheme than any sort of boom.

I’ve articulated the reasons for my thesis, including fast decline rates, the amount of new rigs and wells needed, and a cost of production that’s been higher than the price of sale for some time now.

I’ve also shared recent evidence that this theory is proving correct, from horrid earnings reports — citing the reasons I just mentioned — for oil majors across the board to the fact that mainstream media outlets are starting to put the dots together, running stories like:

“Big Oil Companies Struggle to Justify Soaring Project Costs” —Wall Street Journal

“Dream of U.S. Oil Independence Slams Against Shale Costs” — Bloomberg

“Why America’s Shale Boom Could End Sooner Than You Think” —Forbes

“What Happens When The Shale Boom Ends?” — Christian Science Monitor

After my last article on the subject, I got an email from a sophisticated investor-friend of mine worth hundreds of millions of dollars — some even say a billion. His subject line was: “Awesome Article on Shale.” Here’s what he had to say:

Read More

Bug Bites Cut Florida Orange Crop to Lowest in 2 Decades – Bloomberg

Bug Bites Cut Florida Orange Crop to Lowest in 2 Decades – Bloomberg.

A gnat-sized insect, the Asian citrus psyllid, forced Dean Mixon to replace about 1,000 orange trees in the past two years on the 50-acre Florida farm his grandfather started in the 1930s. The bug spreads a disease called citrus greening, causing fruit to shrink and drop early.

“This is the worst we ever had to deal with,” said Mixon, 62. “Young trees can’t develop strong roots, and the quality of the fruit is also affected. We have been able to slow the spread of the disease, but not eradicate it.”

Florida, the world’s largest orange grower after Brazil, will harvest 121 million boxes of the fruit in the season that began Oct. 1, the fewest since 1990, the U.S. Department of Agriculture estimates. Orange-juice futures in New York will rally 18 percent to $1.6465 a pound by the end of June, up from $1.39 on Dec. 24, according to the average estimate of nine traders and analysts surveyed by Bloomberg News.

Futures entered a bull market this month as dry weather compounds the damage from citrus greening. Some types of oranges, including early and mid-season varieties, are projected to drop prematurely from trees at the highest level since 1961, the USDA said Dec. 10. The shrinking crop may boost costs for companies including Pepsico Inc. (PEP), the maker of Tropicana juices, and Coca Cola Co., which sells Minute Maid and Simply Orange brands. U.S. consumers spend about $1.45 billion on the juice annually.

‘Uncharted Territory’

“We’re in uncharted territory,” said John Ortelle, who has been following the industry for more than 30 years and is vice president for McKeany-Flavell, an Oakland-California based broker whose clients have included Dole Food Co. and Kraft Foods Group. “Whatever producers have tried to tackle the disease has had a minimal effect so far. Growers took out trees and added extra nutrients. You just don’t know when and if the effects will be positive.”

Orange juice rose 18 percent this year on ICE Futures U.S. in New York, trailing only natural gas and cocoa among the 19 raw materials tracked by the Thomson Reuters/Jefferies CRB Index, which declined 4.1 percent. The MSCI All-Country World Index of equities rose 19 percent, while the Bloomberg Treasury Bond Index fell 3.2 percent. The Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 3.8 percent.

Growing areas in Florida received as little as 2 inches (5.1 centimeters) of rain from Oct. 1 through Dec. 22, according to Kyle Tapley, a meteorologist with MDA Weather Services in Gaithersburg,Maryland. That compares with the 30-year average of as much as 8 inches. About 28 percent of the state is experiencing “abnormally dry” weather, according to the U.S. Drought Monitor.

Smaller Fruit

Last season, the USDA cut its production outlook seven times over eight months as drought compounded damage from greening. Smaller fruit size may mean that the final count for this year’s crop will total 115 million boxes, or 5 percent less than the government estimates, said Jerry G. Neff, a branch manager for Bradenton, Florida-based Allendale Risk Management Inc. who was the most-accurate forecaster in a Bloomberg survey before the USDA’s Dec. 10 report. A box weighs 90 pounds (40.8 kilograms).

Greening has discouraged growers from increasing production as new trees must be sown in greenhouses rather than outdoors to avoid further contagion, doubling the cost of planting to about $8 a tree, according to Tom Spreen, a retired University of Florida professor and an industry consultant. The area planted with orange groves will total 459,311 acres this year, the lowest since at least 1978, when the government data begins. The USDA survey was conducted every two years until 2009, when it became annual.

Consumer Demand

Acreage declines have also been spurred by increases in housing development and urban sprawl, said Mixon, whose 50-acre farm in Bradenton, Florida, is down from 350 acres in 2006.

Slowing U.S. consumption may cap price gains for futures, according to Judy Ganes-Chase, the president of J. Ganes Consulting in Panama City, Panama. U.S. retail prices for frozen, concentrated orange juice reached $4.7026 a pound by the end of November, down 5.9 percent from a year earlier. The cost is up 28 percent from a decade ago, threatening consumer demand, Ganes said.

Since Oct. 1, retailers sold 82.39 million gallons as of Nov. 23, down 6.7 percent from a year earlier, the Florida Department of Citrus estimated on Dec. 9, citing data from Nielsen Co. U.S. inventories of frozen orange juice totaled 732.47 million pounds on Nov. 30, up 22 percent from a year earlier, government data show.

Cutting Calories

Some consumers are looking for lower-calorie options, said Ross Colbert, a global beverage-strategist at Rabobank International in New York who’s been studying the industry for more than 10 years. U.S. per-capita consumption fell to 3 gallons in 2012 from 4 gallons in 2008 and 5.5 gallons in 2000, Colbert said. An 8-ounce serving of orange juice has about 110 calories, according to the government. In the past 10 years, water consumption has increased the most among all beverages, he said.

Production of oranges in Brazil will climb 8.5 percent to 435 million boxes in the 12 months ending June 30, 2014, from a year earlier, and juice output will jump 18 percent, the USDA’s Foreign Agricultural Service said in report Dec. 16. Yields will rise 12 percent.

“Brazil could take care of any shortfall we may have in production,” said James Cordier, founder of Optionsellers.com in Tampa, Florida. “While the U.S. crop is the smallest we’ve seen in many years, sales at the retail level are still sluggish.”

Hedge Funds

Hedge funds and other large speculators are increasing bets on a price rally. As of Dec. 17, money managers raised their net-long position by 11 percent from a week earlier to 2,652 futures and options, Commodity Futures Trading Commission data show. That’s the highest in three months.

First found in Florida in 1998, the Asian psyllid thrived on the state’s temperate climate and sap collected from foliage as it spread the bacterial-disease to all 32 counties that produce oranges commercially. Greening has cost the state’s economy $4.5 billion in lost revenue and eliminated 8,200 jobs amid spending cuts since being discovered in 2005, according to the Citrus Research and Development Foundation.

The USDA said Dec. 12 it was providing $1 million for research projects aimed at combating the disease. An additional $9 million has been spent through a government research program for specialty crops. More funds may be allocated in a new farm bill currently being negotiated by lawmakers.

500,000 Trees

Rick Kress, the president of Clewiston, Florida-based Southern Gardens Citrus, has replaced about 500,000 trees since 2005 because of psyllid infestation and greening. The company has about 1.8 million trees planted on more than 16,500 acres, and can process as much as 20 million boxes of oranges per season, according to its website.

Mixon, the Florida grower, has tried fighting the insect with pesticide and increasing fertilizer use to strengthen trees. Groves have also been damaged by other crop diseases including citrus canker, which causes leaves and fruit to drop prematurely, he said.

“We use pesticide, but the problem is that if it rains, it can be washed off, or if you don’t catch the psyllid at the right time, it becomes ineffective,” Mixon said. “If you use too much pesticide, you can actually burn the fruit, which can then become useless for fresh fruit or juice.”

The risk of frost in coming months may further threaten Florida’s crop, while U.S. demand increases seasonally as consumers drink more to boost their vitamin C intake and guard against influenza, said Fain Shaffer, the president of Infinity Trading Corp. in Indianapolis.

Brazil Stockpiles

While output is forecast to increase in Brazil, the country’s stockpiles are heading for a three-year low, the USDA’s Foreign Agricultural Service estimated on Dec. 16. At the end of June 2014, inventories will drop to 93,000 metric tons, down from 205,000 a year earlier and 474,000 tons in 2012, according to the report.

Total output of frozen concentrate in the 12 months that ended in June 2013 fell 23 percent in Brazil because of lower availability for fruit processing and low industrial yields, the USDA said. Crop diseases including greening are boosting production costs in the South American country, prompting some farmers to switch to crops including sugarcane and rubber, according to Conab, the government crop-forecasting agency.

Reduced imports from Brazil may shrink U.S. inventories that, while up from 2012, are 49 percent smaller on average this year than a decade ago, government data show.

“We’re in a serious supply problem,” said Shawn Hackett, the president of Hackett Advisors Inc. in Boynton Beach, Florida. “Citrus greening is a structural problem, and Brazil is having its own issues. There’s no way to turn this around. Prices are going to go higher.”

 

Fed Seen Tapering QE in $10B Steps in Next Seven Meetings – Bloomberg

Fed Seen Tapering QE in $10B Steps in Next Seven Meetings – Bloomberg.

The Federal Reserve will probably reduce its bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said.

The median forecast in a Bloomberg survey of 41 economists matches the $10 billion reduction announced two days ago as the Fed began to unwind the unprecedented stimulus that has defined Ben S. Bernanke’s chairmanship.

The Federal Open Market Committeesaid in a statement it will slow buying “in further measured steps at future meetings” if the economy improves as forecast. The Fed may taper its buying by about $10 billion per gathering, Bernanke said at a press conference in Washington on Dec. 18.

“If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases, Bernanke said, calling $10 billion in the “general range” for a “modest” reduction. If the economy slows, the Fed may “skip a meeting or two,” and if the economy accelerates it may taper a “bit faster.”

Such predictable increments would extend Bernanke’s push toward greater transparency and openness at the Fed, said Dana Saporta, an economist at Credit Suisse Group AG in New York.

The Fed Tiptoes Into a Taper

“Doing this would avoid the drama of having to come to a consensus at each meeting,” Saporta said. “It may have been difficult enough to agree on the timing, size and composition of the first taper, so maybe no one has the appetite to do that on an ongoing basis.”

Exceeded Expectations

A report today showed third-quarter growth exceeded expectations. Gross domestic product climbed at a 4.1 percent annualized rate, the strongest since the final three months of 2011 and up from a previous estimate of 3.6 percent, Commerce Department figures showed in Washington.

The Standard & Poor’s 500 Index rose 0.4 percent to 1,816.33 at 10:17 a.m. in New York, while the yield on the 10-year Treasury note fell 0.02 percentage point to 2.91 percent.

Bernanke’s second four-year term ends Jan. 31, and Vice Chairman Janet Yellen is awaiting Senate confirmation to succeed him.

The Fed coupled its decision to taper bond purchases with a stronger commitment to keep its benchmark interest rate low. Bernanke said the decision was intended to “keep the level of accommodation the same overall.”

Jobless Rate

Unemployment fell to a five-year low of 7 percent in November as employers added 203,000 workers to payrolls. Inflation measured by the personal consumption expenditures index was 0.7 percent in October and has remained below the Fed’s 2 percent objective for almost a year and a half.

The Fed’s balance sheet rose to a record $4.01 trillion as of Dec. 18, up from $2.82 trillion when it began the third round of purchases. The FOMC began QE3, as the program is known, in September 2012 with monthly purchases of $40 billion in mortgage bonds and added $45 billion in Treasury purchases starting in December 2012.

The balance sheet will expand to about $4.4 trillion by the time the program ends, according to median estimates in the survey. Economists forecast purchases in the third round eventually will reach $800 billion in mortgage bonds and $789 billion in Treasuries.

 

Boomer Reality: 61…And Still Living In The Basement | Zero Hedge

Boomer Reality: 61…And Still Living In The Basement | Zero Hedge.

87-year-old Lew Manchester has just returned from a 3-week trip touring Buddhist temples in Laos and cruising the Mekong Delta in Vietnam. His 61-year-old daughter Lee lives year-round in the basement of her friend’s Cape Cod cottage, venturing into the winter cold to get to the bathroom. As Bloomberg reports, Lew is making the most of his old age. Lee is paring back and lightening her load as she looks ahead to her later years. Both worked all their lives, both saved what they could. “Timing is everything and my dad’s timing with jobs, real estate and retirement benefits was better,” said Lee. A rising tide of graying baby boomers is less secure financially and has a lower standard of living than their aged parents.

Via Bloomberg,

The median net worth for U.S. households headed by boomers aged 55 to 64 was almost 8 percent lower, at $143,964, than those 75 and older in 2011, according to Census Bureau data. Boomers lost more than other groups in the stock market and housing bust of 2008, and many also lost their jobs in the aftermath at a critical point in their productive years.

 

 

“Baby boomers are the first generation without the safety net of pensions and other benefits their parents have,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “They’re facing a much more challenging old age.”

 

 

Lee said she harbors no resentment for her dad, who she credits with instilling her with a strong work ethic. “I was never allowed to dream,” she said. “My parents and then my husband expected me to work, and I couldn’t really think about what I most wanted to do.”

 

 

Lee is hardly the only baby boomer who didn’t save enough, worked for companies without 401(k) accounts or lost significant amounts in the financial crisis. Today, her retirement savings of $120,000 are right at the median 401(k) balance for households headed by baby boomers, according to 2011 data from the Center for Retirement Research at Boston College.

 

That will provide just $4,800 a year to boomers when they turn 65, assuming they take out 4 percent annually, the limit financial planners say should be withdrawn to assure retirees don’t run out of money in their lifetimes.

 

 

Had boomers like Lee been thriftier, they would have still been hurt by a shift to 401(k) accounts from pensions in the 1980s. Thirty-seven percent of the elderly in the U.S. collect pensions, which provide some guaranteed income until they die. Fewer than 10 percent of boomers collect pensions, and that number is quickly shrinking.

 

 

“She has never complained to me about not having enough money,” he said. “But if she needs it, I’ll advance it.”

 

Lee, who has repaid the money she borrowed, avoids dwelling on her difficulties during her weekly calls to her dad.

 

“I know he’ll help me if I fall off the ledge, but he taught me to be self-sufficient,” she said.

 

 

It’s liberating finally getting to a point in my life where I don’t need a lot of stuff,” she said. “I felt like I was getting rid of the baggage of life that I’d kept dragging behind me and which was just weighing me down.”

 

 

Lee doesn’t regret downsizing her life. She has more time than ever to enjoy the outdoors, read and spend time with her friends.

 

“There’s so much pressure to keep up, to keep buying things, to stay on the treadmill always hoping to have more,” she said. “Well, less can be better.”

 

 

Russia’s Largest Bank Proposes Bitcoin Alternative | Zero Hedge

Russia’s Largest Bank Proposes Bitcoin Alternative | Zero Hedge.

Hot on the heels of JPMorgan’s “web cash” developments in the virtual currency arena, the CEO of Russia largest bank – Sberbank – appears to be looking for alternatives…

  • *SBERBANK CEO GREF SAYS FUTURE BELONGS TO VIRTUAL CURRENCIES
  • *GREF SAYS DEVELOPMENT OF VIRTUAL CURRENCIES ‘CAN’T BE STOPPED’
  • *SBERBANK CEO CALLS FOR GREATER REGULATION OF VIRTUAL CURRENCIES
  • *SBERBANK MAY FORM OWN VIRTUAL CURRENCY ON BASIS OF YANDEX MONEY

When a pseudonymous ‘Japanese’ coder creates a crypto-currency that gains acceptance among thousands of vendors, it’s dismissed by the powers-that-be and called a ponzi scheme by the MSM. One wonders what happens when the largest banks of the US and Russia sanction the ‘idea’ of a decentralized, unregulated, ‘money’ transfer system.

Via Bloomberg,

“We are at a new stage of technological development. I can’t imagine how it can be stopped,” Sberbank CEO Herman Gref tells reporters in Moscow.

 

Gref says virtual currencies need greater regulation

 

“These experiments must end in one or two crashes” before virtual currencies become firmly established, Gref says

 

Says Yandex Money isn’t “a currency but it’s a first step in that direction”

 

Of course, the difference is – the banks want to own it…

 

GM Channel Stuffing Surges To Second Highest Ever | Zero Hedge

GM Channel Stuffing Surges To Second Highest Ever | Zero Hedge.

Confused why the various US manufacturing indices have been on a tear in the past few months? Perhaps the fact that GM dealer lots are so full of cars they just couldn’t wait for even more deliveries has something to do with it. Which is also why in addition to reporting sales numbers for November that were largely in line with expectations, amounting to 212,060 (even if total Chevy Volts sold YTD of 20.7K were -0.6% less than in the same period in 2012), or 13.7% more than last year (estimated called for 13.% increase), of which a whopping 51,705 was in the form of “channel stuffed” units to be parked on dealer lots.

In fact, as the chart below shows, in the past three months, GM channel stuffing has exploded and soared by 150K units (the most ever for a 3 month period) from 628.6K to 779.5K. This represents the second highest amount of channel stuffing and is lower only compared to the 788.2K units “stuffed” exactly one year ago.

And while the topic of channel stuffing is not new here, as we have been covering it closely for the past three years, it is of note that even “serious” media such as Bloomberg pointed out yesterday that across the entire US car industry, and not just GM, channel stuffing is now the highest it has been since 2005. Surely all this pent up demand is there for a reason: after all, as in every centrally-planned economy, if you build it they will surely come…

 

Detroit Bankruptcy Judge Rules To Allow Pension Haircuts, Says Detroit Eligible To File Chapter 9 | Zero Hedge

Detroit Bankruptcy Judge Rules To Allow Pension Haircuts, Says Detroit Eligible To File Chapter 9 | Zero Hedge.

Update, and it’s official: 

  • JUDGE: DETROIT ELIGIBLE FOR IMMEDIATE BANKRUPTCY PROTECTION
  • DETROIT TO REMAIN UNDER BANKRUPTCY COURT PROTECTION, JUDGE SAYS

As somewhat expected – though hoped against by many Detroit union workers – Judge Steven Rhodes appears to have confirmed Detroit is eligible for bankruptcy protection (after pointing out that the city’s accounting was accurate and it is indeed insolvent) making this the largest ever muni bankruptcy.

  • JUDGE RHODES SAYS HE WILL ALLOW PENSION CUTS IN DETROIT’S BANKRUPTCY
  • DETROIT JUDGE: NOTHING SEPARATES PENSIONS FROM OTHER DEBT

The city will now begin working toward its next major move – the submission of a plan to re-adjust its more than $18 billion in debt – including significant haircuts for pension funds (possibly 16c on the dollar recovery) and bondholders. With Detroit as precedent, we can only imagine the torrent of other cities in trouble that will be willing to fold.

He did provide an “out” though:

  • RHODES WARNS THE CITY THAT JUST BECAUSE PENSION RIGHTS CAN BE IMPAIRED, DOESN’T MEAN HE WILL APPROVE A PLAN WITH STEEP CUTS

Via Bloomberg,

Before the bankruptcy, Orr proposed canceling $3.5 billion in future pension obligations and at least $1.4 billion in unsecured bonds. The debts would be replaced with a $2 billion note paying 1.5 percent interest.

But, of cours,

Detroit must ask “what is necessary to invest to attract business?” Spiotto said in a phone interview. “If you don’t solve the systemic problem, you are just going to repeat it.”

 

 

PBOC Says No Longer in China’s Interest to Increase Reserves – Bloomberg

PBOC Says No Longer in China’s Interest to Increase Reserves – Bloomberg.

The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.

Yi Gang, deputy governor of People’s Bank of China and head of the State Administration of Foreign Exchange, said in the speech that the appreciation of the yuan benefits more people in China than it hurts. Photographer: Brent Lewin/Bloomberg

China Economic Reforms Will Broaden Growth: Hormats

5:00

Nov. 20 (Bloomberg) — Robert Hormats, former U.S. undersecretary of state for economic growth, talks about the outlook for China’s planned economic reforms and outlook for talks in Geneva between world powers and Iran over a nuclear deal. Hormats speaks with Tom Keene on Bloomberg Television’s “Surveillance.” Judd Gregg, chief executive officer of the Securities Industry and Financial Markets Association, also speaks. (Source: Bloomberg)

China Growth Momentum Already Peaked: Kowalczyk

6:27

Nov. 19 (Bloomberg) — Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, talks about China’s economy. He speaks with Rishaad Salamat on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

BNY's Derrick on Currency Wars, Market Imbalances

5:35

Nov. 21 (Bloomberg) — Simon Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., talks about global currency market imbalances and China’s yuan policy. He speaks from Singapore with Angie Lau on Bloomberg Television’s “First Up.” (Source: Bloomberg)

Loong on China's Economic, Financial Reform Plan

7:07

Nov. 19 (Bloomberg) — Pauline Loong, managing director at Asia-Analytica, talks about China’s reform plan and the outlook for the nation’s economy and financial system. She speaks with Angie Lau on Bloomberg Television’s “First Up.” (Source: Bloomberg)

China’s foreign-exchange reserves surged $166 billion in the third quarter to a record $3.66 trillion, more than triple those of any other country and bigger than the gross domestic product of Germany, Europe’s largest economy. The increase suggested money poured into the nation’s assets even as developing nations from Brazil to India saw an exit of capital because of concern the Federal Reserve will taper stimulus.

Yi, who is also head of the State Administration of Foreign Exchange, said in the speech that the yuan’s appreciation benefits more people in China than it hurts.

‘Less Interventionist’

His comments are “consistent with the plans to increase therenminbi’s flexibility so they become less interventionist,”Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong, said by phone today. The central bank may widen the yuan’s trading band in “the coming few months,” he added.

The yuan’s spot rate is allowed to diverge a maximum 1 percent on either side of a daily reference rate set by the People’s Bank of China. The trading range was doubled in April 2012, after being expanded from 0.3 percent in May 2007. The band could be widened to 2 percent, Hong Kong Apple Daily reported today, citing an interview with the Hong Kong Monetary Authority’s former chief executive Joseph Yam.

Capital inflows into China accelerated in October, official data suggest. Yuan positions at the nation’s financial institutions accumulated from foreign-exchange purchases, a gauge of capital flows, climbed 441.6 billion yuan ($72 billion), the most since January.

About half of October’s increase in the positions was attributable to surpluses in trade and foreign direct investment, with the rest accounted for by inflows of “hot money,” Goldman Sachs Group Inc. Hong Kong-based analysts MK Tang and Li Cui wrote in a Nov. 18 note.

Stronger Yuan

The yuan has appreciated 2.3 percent against the greenback this year, the best-performance of 24 emerging-market currencies tracked by Bloomberg. Non-deliverable 12-month forwards rose 0.2 percent this week and reached 6.1430 per dollar on Nov. 20, matching an all-time high recorded on Oct. 16. The currency was little changed at 6.0932 as of 10:33 a.m. in Shanghai today.

“It appears that many in the People’s Bank think the time is about right to scale back currency interventions,” Mark Williams, London-based chief Asia economist at Capital Economics Ltd., wrote in an e-mail yesterday. “But China has got itself into a situation where stopping intervention will be very hard to do” and comments such as Yi’s will spur speculative inflows, he added.

Less intervention and smaller gains in foreign-exchange reserves may damp China’s appetite for U.S. government debt. The nation is the largest foreign creditor to the U.S. and its holdings of Treasuries increased by $25.7 billion, or 2 percent, to $1.294 trillion in September, the biggest gain since February. U.S. government securities lost 2.6 percent this year, according to the Bloomberg U.S. Treasury Bond Index. (BUSY)

Yi’s comments didn’t imply China will be cutting its holdings of U.S. government debt, said Scotiabank’s Tihanyi. “They are probably going to keep their allocations reasonably stable unless there’s a big policy shift, but it means they will possibly be buying less at the margin,” he said.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing atxzhou68@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net; Rosalind Mathieson at rmathieson3@bloomberg.net

 

Race to Bottom Resumes as Central Bankers Ease Anew: Currencies – Bloomberg

Race to Bottom Resumes as Central Bankers Ease Anew: Currencies – Bloomberg.

The global currency wars are heating up again as central banks embark on a new round of easing to combat a slowdown in growth.

The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.”

A customer selects two hundred denomination Czech koruna currency notes from her wallet in Prague, Czech Republic. Photographer: Martin Divisek/Bloomberg

Westpac Selling Into Euro, `Long' Dollar-Korean Won

4:34

Nov. 11 (Bloomberg) — Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, talks about the U.S. and the Australian dollars, and global trading strategy. He speaks with Rishaad Salamat on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

Aussie Seen Weaker Versus U.S. Dollar Medium Term

1:00

Nov. 11 (Bloomberg) — Peter Rosenstreich, head of market strategy at Swissquote Bank SA, talks about the outlook for the Australian dollar and the U.S. dollar. He spoke Nov. 8 from Geneva. (Source: Bloomberg)

A pedestrian passes advertisements for koruna currency coins in Prague. The Czech National Bank drove its koruna down by 4.4 percent versus the euro on Nov. 7, the most since the single currency’s creation in 1999, when it intervened to spur inflation. Photographer: Bartek Sadowski/Bloomberg

The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega, seen here, in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.” Photographer: Peter Foley/Bloomberg

“It’s a very real concern of these countries to keep their currencies weak,” Axel Merk, who oversees about $450 million of foreign exchange as the head of Palo Alto, California-based Merk Investments LLC, said in a Nov. 8 telephone interview. ECB President Mario Draghi, “persistently since earlier this year, has been trying to talk down the euro,” Merk said.

With the outlook for the global economy being downgraded by the International Monetary Fund and inflation slowing to levels that may hinder investment, countries and central banks are revisiting policies that tend to boost competitiveness through weaker currencies.

Mantega’s ‘War’

The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.”

“We’re seeing a new era of currency wars,” Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London, said in a Nov. 8 telephone interview.

The ECB lowered its benchmark rate on Nov. 7 by a quarter-point to a record 0.25 percent, a reduction anticipated by just three of 70 economists in a Bloomberg survey. Draghi said the cut was to reduce the risk of a “prolonged period” of low inflation and the euro’s strength “didn’t play any role” in the decision. Euro-region consumer-price inflation has remained below the ECB’s 2 percent ceiling for the past nine months.

The euro slumped as much as 1.6 percent against the dollar on the day of the rate cut, the most in almost two years, before ending the week at $1.3367. It rose 0.2 percent today to $1.3390 at 10:01 a.m. in London.

The shared currency pared gains versus a basket of nine developed-market peers this year to 5.6 percent, from as much as 7.2 percent at its Oct. 29 peak, Bloomberg Correlation-Weighted Indexes show.

‘Quite Weak’

“There are places in the world where economies are generally quite weak, where inflation is already low,” Alan Ruskin, global head of Group-of-10 foreign exchange in New York at Deutsche Bank AG, the world’s largest currency trader, said in a Nov. 8 phone interview. “Japan was in that mix for 20-odd years. Nobody wants to go there” and “the talk from Draghi shows they’re taking the disinflation story very seriously. The Czech Republic is the same story.”

The Czech National Bank’s drove its koruna down by 4.4 percent versus the euro on Nov. 7, the most since the single currency’s creation in 1999, when it intervened to spur inflation. Governor Miroslav Singerpledged to keep selling koruna “for as long as needed” to boost growth.

The IMF last month cut its forecast for global economic growth to 2.9 percent in 2013 and 3.6 percent in 2014, from July’s projected rates of 3.1 percent and 3.8 percent. It also sees inflation in developed economies remaining short of the 2 percent rate favored by most central banks.

Trade Slowdown

Growth in global trade may slow to 2.5 percent in 2013, the new head of the World Trade Organization said after a Sept. 5-6 summit of G-20 nations in St. Petersburg, Russia, down from the organization’s previous estimate in April of 3.3 percent. Even so, the G-20 participants agreed to “refrain from competitive devaluation” and not “target our exchange rates for competitive purposes.”

“The idea that central banks are setting policies to weaken their currencies has always been overstated,” Adam Cole, Royal Bank of Canada’s head of G-10 currency strategy in London, said in a Nov. 8 phone interview. “In most cases they’re happy to see their currencies fall, but they’re not going out of their way to induce weakness.”

German airline Deutsche Lufthansa AG cited the strong euro last month when its profit estimate fell short of analysts’ forecasts, while French luxury-goods maker LVMH Moet Hennessy Louis Vuitton SA said on Oct. 16 that the currency’s gains versus the dollar and Japanese yen shaved 6 percent off third-quarter revenue.

Lufthansa, LVMH

Lufthansa said on Oct. 22 this year’s operating profit will be 600 million euros to 700 million euros, below an estimate of about 918 million euros by analysts surveyed by Bloomberg.LVMH, whose Louis Vuitton brand’s founder built his reputation as a luggage-maker for the wife of Napoleon III, said it has hedged 90 percent of its euro-yen exposure for this year and about 66 percent for next year.

“Do I think the euro-zone central bank wanted to engage in a currency war?” Lane Newman, a director of foreign exchange at ING Groep NV in New York, said in a Nov. 8 phone interview. “I think, post facto, yes. Because they cut rates knowing it was going to put the euro on the back foot.”

While the ECB hasn’t said it’s explicitly targeting the euro, comments from policy makers signal they consider exchange rates in their decisions. An ECB spokesman declined to comment when contacted on Nov. 8.

‘Attentive’ ECB

“As you know, the exchange rate is not a policy target for the ECB,” Draghi said at a press conference on Oct. 2. “The target for the ECB is medium-term price stability. However, the exchange rate is important for growth and for price stability. And we are certainly attentive to these developments.”

At the same time the ECB is easing, the U.S. Federal Reserve said it will keep printing enough dollars to buy $85 billion of bonds each month because the economy is still too weak to stand on its own. The Bank of Japan is also employing a policy of quantitative easing.

Reserve Bank of New Zealand Governor Graeme Wheeler has cited the risk of slow inflation and currency gains as reasons for not raising the nation’s official cash rate from a record-low 2.5 percent this year. That’s even with the need to tackle what he has described as an overheated housing market. The kiwi rose 4.5 percent in the past four months, Bloomberg Correlation Indexes show.

Australia’s dollar is 27 percent overvalued against the greenback, according to a gauge of purchasing-power parity compiled by the Paris-based Organization for Economic Cooperation and Development.

‘New Era’

The Reserve Bank of Australia lowered its growth estimate for next year to 2 percent to 3 percent, compared with 2.5 percent to 3.5 percent three months ago. South Korea’s finance ministry said last month it may act to counter “herd behavior” in the currency, as the Bank of Korea lowered its outlook for the economy.

The Fed said in October it needed to see more evidence of a U.S. recovery before it trims the Treasury and mortgage-bond purchases it uses to pump money into the financial system.

Analysts surveyed by Bloomberg last week predicted the Fed would delay tapering until March even though a Labor Department report on Nov. 8 showing employers added a larger-than-forecast 204,000 workers in October.

“People aren’t as content as they once were about being on the end of dollar weakness, and hence an appreciation of their own currencies,” Bank of New York’s Mellor said. “We’ve had a change in tone from South Korea, Australia and New Zealand.”

 

 

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