Ten states, some 150 cities, and 1,100 businesses, universities and organizations insist “We are still in” – committed to the Paris climate agreement and determined to continue reducing carbon dioxide emissions and preventing climate change. In the process, WASI members claim, they will create jobs and promote innovation, trade and international competitiveness. It’s mostly hype, puffery and belief in tooth fairies.
Let’s begin with the climate. When Delaware signed on to WASI, for example, Governor Carney cited rising average temperatures, rising sea levels, and an increase in extreme weather events. In Delaware, sea level rise is almost entirely due to subsiding land resulting from compaction of glacial outwash, isostatic response from the retreat of the ice sheets more than 12,000 years ago, and groundwater extraction.
The biggest threat to homes, roadways and wildlife habitats lies not in sea level rise – but in the effects of nor’easters, tropical storm remnants and other weather events that impact Delaware’s sand-built barrier islands. Moreover, not a single category 3-5 hurricane has struck the US mainland for a record 11.5 years.
Climate models have long overstated the supposed rise in air temperature. Recently, even alarmist scientists like Ben Santer have agreed that a warming hiatus has kept air temperatures unchanged for over 15 years, even as plant-fertilizing carbon dioxide levels in Earth’s atmosphere rose to 400 parts per million.
No trends exist in tropical cyclones, tornadoes, floods, droughts or other weather extremes. Contentions that these changes will pose health risks and threaten our economy are purely scare tactics. Climate has always changed and weather is always variable, due to complex, powerful natural forces. Insisting that these events must be caused or exacerbated by human activity reflects a denial of basic climate science.
Full adherence to the Paris Treaty by all nations would prevent an undetectable 0.3°F (0.2°C) rise by 2100 – assuming that all climate change is driven by humans and not by natural forces. This meaningless achievement, by switching to 100% renewable energy, would cost $12.7 trillion to $93 trillion by 2030.
Surely, WASI members and the rest of the world have better uses for that money than chasing climate chimeras. Paying their massive state debt, pension, welfare and retirement obligations, for instance; in developing nations, getting electricity and safe water to people and ending their poverty and disease.
But substantially reducing CO2 emissions will create jobs, won’t it? For every job these mandates and subsidies create, multiple jobs will be lost in businesses that require affordable, reliable energy. Your local or statewide CO2 emissions may decrease. But in 150+ countries that are under no obligation under Paris to reduce their fossil fuel use, emissions will increase. WASI groups may take pride in “resisting Trump,” but their actions really hurt America’s working class families, who had no vote on the matter.
WASI members California, Connecticut, Hawaii and New York already have among the worst unfunded pension liabilities. Their residential electricity prices are already outrageous: 17 cents a kilowatt-hour in NY, 19 in CA, 20 in CT and 29 in HI – versus 9 cents in North Dakota. Honoring “Paris commitments” would send rates skyrocketing to German and Danish levels: 37 cents per kWh. Expensive energy will hurt poor and minority families the most and send jobs to countries where energy costs less.
Just imagine what your WASI actions would do to households, hospitals, businesses, factories, malls and schools. How it would kill jobs and swell unemployment and welfare rolls – while creating a lot of low-pay, largely part-time jobs. Rather than producing jobs, the Paris Treaty is a job-killer for the USA.
For all these reasons, we should be glad we are out! We ask those who have told their constituents they are “still in,” How exactly will you meet your Paris commitments, and what exactly will you achieve?
How will you slash your CO2 emissions by 26-28% by 2025, as required for the USA under the Paris pact? The United States reduced CO2 emissions by 12% between 2005 and 2015. But that was accomplished by a downturn in the economy and increased reliance on natural gas, most of which is produced by hydraulic fracturing. Will you support fracking and build more gas-fired power plants?
Or will you build new nuclear and hydroelectric power plants to reduce your fossil fuel dependence? You cannot rely on wind and solar, as they currently account for barely 2% of overall US energy needs and the mining required to get rare earth metals, cadmium, iron, copper, limestone and other raw materials for these technologies has extensive, often horrendous environmental, health and human rights impacts.
Growing populations mean more energy will be needed. Do you expect wind and solar to grow to cover the new demand? These highly expensive technologies require vast land areas, much of it taken from wildlife habitats – and huge government/taxpayer subsidies. From whom will you take this money?
What will you get for your efforts? The cost is enormous, for minimal benefits. Higher electricity prices will affect businesses, hospitals, jobs and families in your state. The impact of 30, 40 or 50 cents per kilowatt-hour electricity will be devastating – especially for the poor, minority and blue-collar workers and families you say you care deeply about. They will be forced to choose among energy, food, clothing, shelter, health and safety. How will this serve climate and environmental justice?
By contrast, a change in global air temperature of about 0.01°F will have zero impact. That’s how much reduced warming the world is likely to see from all the sacrifices imposed by “We are still in” programs. Storms, floods and droughts are not linked to CO2 concentrations, so your actions will have no effect in these areas. Avoidance of an un-measurable increase in air temperature is simply not worth the cost.
Governors who have committed their states to this climate-centered resistance movement have done so without approval from the legislature or their constituents. How do you propose to pay for this unilateral executive decision? With tax increase and soaring energy costs? How will your constituents react to that?
The “We are still in” press release proudly proclaims that its members contribute $6.2 trillion a year to the US economy. That’s one-third of the United States $18.5 trillion GDP in 2016.
Under the Paris formula, the United States is to contribute $23.5 billion per year initially to the Green Climate Fund – with the US contribution rising to some $106 billion per year by 2030, based on the same percentages. Your one-third WASI share of that would be $7.8 billion in 2017, rising to $35 billion a year by 2030. Is this part of your vaunted commitment to the Paris treaty? How do you anticipate paying that?
Can individual cities and counties opt out of your pact, and become sanctuary cities or counties, to protect their jobs and families against runaway energy costs, climate fund payments and more autocratic actions?
By deciding that their schools will stay in the Paris Treaty, college and university presidents will drive up energy and other costs on their campuses. Did you consult with and get approval from your boards of trustees, legislators, taxpayers, students and parents – or was this simply another executive decision?
Delaware gets 95% of its electricity from natural gas, coal and oil. How exactly will the University of Delaware slash its fossil fuel use and carbon dioxide emissions by the 26-28% required by Paris? How will George Mason University, with Virginia getting 63% of its electricity from fossil fuels?
Have you calculated how much this will cost? Will you make up the difference by increasing tuition? How will you compensate those who can least afford these increasing expenses? In the interest of integrity, accuracy, transparency and ethics, have you made those analyses public (if they exist)?
Did all you “socially responsible” companies and organizations in WASI get approval from your boards of directors, shareholders, customers and clients before committing to stay in Paris? Did you analyze and discuss the likely economic and employment ramifications? Or are you the real climate deniers – denying the costs of anti-fossil fuel, renewable energy commitments, regulations, subsidies and mandates?
Finally, for the millions of voters, taxpayers, citizens, students, workers and consumers who are being impacted by “We are still in” states, cities, colleges, universities, businesses and organizations, we ask:
Are you still in with expending trillions of dollars to have an undetectable effect on Earth’s future climate? If not, perhaps it’s time you made your voices heard – and started resisting The Resistance.
Vía The Freedom Pub http://ift.tt/2sIMQ06
If one considers the evidence, it is evident that U.S. antitrust enforcers have enabled the current “new normal” of online winner-take-all platforms: Alphabet-Google in e-information, Amazon in e-commerce, Facebook in e-social, Uber in e-transportation services, Airbnb in e-accommodation services, and a “unicorn” queue of online winner-take-all platform wannabes.
Summary of Conclusions
U.S. antitrust officials should be alarmed by the extreme early concentration of a relatively young twenty-year old, U.S. online company marketplace.
Five online winner-take-all platforms — Google, Amazon, Facebook, Uber and Airbnb — already command ~80% of U.S. online companies’ revenue share and market capitalization.
And they are collectively capturing 82% of U.S. online companies’ revenue growth share, meaning they are growing more dominant not less.
Adding to the reality that their respective platform dominances are lasting, is the fact thatthese platforms are also dominating the consumer data collection and analysis that is essential to being able to compete, grow, and succeed going forward in online revenue growth and diversification, and to innovate to compete in artificial intelligence, machine learning, and targeted advertising.
“If data is the new oil,” these winner-take-all platforms are extracting, organizing, and leveraging the most valuable and specific, potential, mass consumer data sets anywhere.
And as long as the DOJ and FTC continue to not consider privacy/data to be a non-price factor in antitrust enforcement, DOJ unwittingly will be the key enabler and protector of these online platforms’ data-driven, winner-take-all, market power maintenance and extension long-term.
Why U.S. Antitrust Non-Enforcement Produces Online Winner-Take-All Platforms
If “competition is a click away,” how could today’s Internet ecosystem, become as winner-take-all online in the 21st century, as late 19th century America was when monopoly “trusts” in steel, oil, and railroads, precipitated the world’s seminal antitrust laws?
The public Internet obviously happened in 1994 and fundamentally changed how most markets and competition worked. However, U.S. antitrust enforcers obviously have not adapted antitrust enforcement to the new online market contexts, because if they had, we would not have America 1890’s redux.
It will be telling if the new Trump Administration antitrust team comes to acknowledge that all is not well in the U.S. antitrust universe, and that there are accelerating, serial, online winner-take-all, outcomes that are uncharacteristic of offline markets, and that would have been prevented in offline markets via normal antitrust enforcement.
At bottom, Trump Administration antitrust enforcers find themselves at an historic crossroads.
Are all these winner-take-all platforms “innocent” monopolies and winners on their own legal merits?
If yes, does the online marketplace inherently multiply “natural monopolies” that have no need to engage in anti-competitive behavior to foreclose competition or require antitrust enforcement, oversight or utility regulation?
If no, are these online winner-take-all platforms at least partially a result of U.S. antitrust non-enforcement and/or anti-competitive foreclosure behaviors warranting antitrust investigation and potentially antitrust enforcement action?
The evidence U.S. antitrust non-enforcement producing online winner-take-all platforms.
To start, why are these five companies considered online winner-take-all platforms?
Google Amazon, Facebook, and Uber are on this list because they each are roughly ten times bigger by revenues, users and inventory than their nearest competitor; and Airbnb is included also because its value is about eight times is nearest competitor HomeAway and its 2.3m room inventory is already more than the top three hotel chains combined, and separating more.
In addition, these five winner-take-all platforms command 77% of the total revenues, 82% of the total revenue growth, and 80% of the market capitalization, of the overall online market of online-based and founded companies. (These estimates use the Internet Association’s 39 members as the best proxy for this online market and excludes Microsoft here, because it did not originate online and it has no dominant online market positions or online network effects.)
The current “winner-take-all” term to describe these online platforms came from billionaire Sir Richard Branson and was captured in an excellent New Yorker piece by widely respected Silicon Valley blogger and venture capitalist, Om Malik.
What makes these online platforms winner-take-all?
Ironically, Alphabet-Google Chairman Eric Schmidt has provided some of the best explanations for this online winner-take-all platform phenomenon.
In 2011, Dr. Schmidt explained: “The fastest path to wealth is the construction of these digital platforms, in which a company becomes the center of activity and where other people depend on you.”
In 2012 he elaborated: “We believe that modern technology platforms, such as Google, Facebook, Amazon, and Apple are even more powerful than people realize. These platforms constitute a true paradigm shift, and what gives them power is their ability to grow – specifically their speed to scale. Almost nothing, short of a biological virus, can scale as quickly, efficiently or aggressively as these technology platforms, and this makes the people who build, control, and use them powerful too.” [Note: Apple is not an online-based company and hasn’t continued its growth.]
In 2013, Dr. Schmidt further explained: “Platforms are where the aggregated value occurs; the way the industry creates wealth is creating platforms.”
So specifically, what is the “juice” or “special sauce” that Google, Amazon, Facebook, Uber, and Airbnb all share that make them winner-take-all platforms?
All have aggregated consumer demand to their online branded interface to such a dominant extent that suppliers and competitors effectively must “depend” on these dominant functional interfaces to succeed overall in the marketplace.
Thus, all are de facto online gatekeepers that have aggregated and “cornered” the demand for an online market via an effective form of monopsony power over a functional market segment of the economy, i.e. a dominant buyer with which all sellers must deal to succeed.
Here may be why U.S. antitrust enforcement has stumbled. Online markets are different; they are more prone to monopsonization of demand, whereas offline markets are more prone tomonopolization of supply. (Most antitrust precedents involve monopolies and not monopsonies.)
Thus, Page’s Alphabet-Google, Bezos’ Amazon, and Zuckerberg’s Facebook, are the 21stcentury information, commerce, and social online monopsonists, which are mirror analogs to 19th century Rockefeller-oil, Carnegie-steel, and Vanderbilt-railroads offline industrialmonopolists.
In examining the more monopsonization-prone online world thru the lens of court precedents built on the monopolization-prone offline world, U.S. antitrust has developed an enforcement blind spot, and maybe even an enabling role in facilitating widespread monopsonization of the online economy.
Simply, in offline monopolized markets, the consumer is the real customer and the one that is hurt by anti-competitive behavior.
However, in online monopsonized markets, disintermediated competitors and potential competitors are the real customer and the one that is hurt by this anti-competitive, monopsonist, winner-take-all behavior.
Thus, if an antitrust enforcer assumes even unconsciously that an alleged antitrust offender must be a monopolist to break antitrust law, and sees a price of free and conveniences to the consumer, they have a popular bias to conclude this must be pro-competitive nirvana – the opposite of a traditional offline antitrust problem.
However, this is a grave mistaken assumption, if the alleged antitrust offender is a potentialmonopsonist of demand, where supply prices of free may be an anti-competitive monopsonization strategy to corner, extend, and maintain monopsony-control over online demand for online products and services.
Now one can begin to see how U.S. antitrust non-enforcement can produce online winner-take-all platforms.
So, what is different about these monopsonized markets that requires different antitrust enforcement?
Google, Amazon, Facebook, Uber and Airbnb, are all “intermediary platforms” that mediate or serve as a broker between consumers and suppliers and/or advertisers.
While Section 230 of the 1996 Telecom Act provides online intermediary platforms immunity from liability for what third parties do on their platforms, it does not provide any antitrust immunity for what the online platform may do anti-competitively to third-party competitors and potential competitors that must use these monopsonized intermediary platforms to reach their consumers (per the Telecom Act’s Section 601 antitrust savings clause).
The first epic failure of U.S. antitrust was to not recognize and deal with these emerging monopsonists before they became five full-blown monopsonist-gatekeepers of consumer demand.
The ongoing epic antitrust failure here is not addressing the profoundly anti-competitive market dynamic of five monopsonist intermediary platforms systematically crushing competition from direct competitors and from suppliers across the economy.
In the offline world, it has been well-known and long-appreciated that dominant intermediary platforms are considered “exchanges.”
To ensure competitive markets in most commodities and financial instruments, the government has long required that they are transparently traded on public exchanges where the consistent standard is that the owners and operators of the exchange cannot legally also trade for their own account on that exchange, because that would allow them to unfairly self-deal, front-run, or engage in insider trading via abuse competitors’ confidentiality.
If antitrust authorities appreciate the above, and can understand that no sport team can win a game against a team that is also the referee and owner of the stadium, why are U.S. antitrust authorities to date doing nothing to address the apparent anti-competitive systemic risk to the economy of rampant anti-competitive monopsonization of most online intermediary markets?
Normal retail suppliers of content, products, and services are getting crushed systematically behind the scenes by these winner-take-all platforms and antitrust authorities appear largely oblivious to this economy wide anti-competitive dynamic because, they are ignoring that these platforms are winner-take-all, precisely because they can’t lose operating as both a player and a referee/market-owner.
Simply, U.S. antitrust authorities need to enforce antitrust law against online monopsonists of demand as much as they do offline monopolists of supply.
What else do U.S. authorities need to do to address the anti-competitive “new normal” of serial online winner-take-all platforms?
Two more things.
First, the DOJ and FTC should restore privacy as a relevant non-price factor in antitrust enforcement to address these online platforms’ data dominance that ensures no competitor has much chance to compete effectively in targeted advertising, artificial intelligence and machine-learning, which depend on, and are driven by, the amount and quality of the datafueling the algorithmic computations. “Data is the new oil.”
Over a decade ago, the Bush DOJ and FTC decided to no longer consider privacy to be a relevant non-price factor in antitrust enforcement, which oddly reduced consumer welfare in the online private-data collection context, when a key part of modern antitrust analysis supposedly is to judge a transaction or behavior with a view to its net effect on consumer welfare.
This seminal decision has fostered the perverse market dynamic where many online advertising companies now effectively compete based on who can take advantage of consumer privacy most, rather than compete based on whom best can protect consumer privacy.
Common sense tells us that law enforcement committed to maximizing the effect of deterrence signal neither the exact time/place of their police patrols, nor where they won’t patrol.
However, with privacy and antitrust, authorities have unwittingly telegraphed to the marketplace exactly where they won’t provide accountability, so potential privacy bad actors know they can get away with broad scale anti-competitive abuse of consumers’ privacy with relative impunity.
The predictable anti-competitive result of totally ignoring privacy as a non-price factor in consumer welfare is five online winner-take-all platforms, Google, Amazon, Facebook, Uber, and Airbnb, which all know along with their competitors, that they are unbeatable and unassailable precisely because they command overwhelming relative data dominance of all dimensions of the markets’ activities, supply, demand, inventory, price, usage, interests, place, time, amount, quality, etc.
That fateful decision effectively greenlighted mass-hoovering of all data, private, public, and competitor-confidential, about a market, that in turn generates exponential inter-network effects that inherently make an unlevel data playing field where these five platforms increasingly can’t lose, and their potential competitors increasingly can’t possibly win.
If people or companies have no control over how their private or confidential information is collected and used, there’s little prospect for vibrant competition long-term in the online era.
Second, the DOJ and FTC need to investigate and adapt to these online winner-take-all platforms’ data dominance when it comes to arbitraging the Hart Scott Rodino (HSR) process and the thresholds for reviewing mergers.
When a handful of companies know all the most relevant competitive information in a market, like Google obviously does from dominating search and most information apps; Amazon does by dominating retail ecommerce and Marketplace; and Facebook does by dominating what people share, like, and message; is an exceptional anti-competitive advantage in detecting startups, nascent trends or potential competitive threats to either kill in the crib, or buy cheap at a very early stage.
We know the dynamic of these platforms arbitraging the HSR antitrust review process exists because Alphabet-Google Chairman Schmidt told reporters that Google made a 2010 decision to accelerate acquisitions of companies below the HSR threshold, i.e. the amount that is subject to DOJ/FTC notification and waiting period.
Serial acquisition of many dozens of early-stage acquisitions has had an obvious role in facilitating Google, Amazon and Facebook’s online winner-take-all platforms, given the evidence of Alphabet-Google’s 206 acquisitions in 19 years; Amazon’s 77 in 19 years; and Facebook 62 in 12 years.
When one looks at these five online winner-take-all platforms, a close observer also appreciates that they are part of an effective American version of a Japanese Keiretsu.
Amazon’s Jeff Bezos was one of the earliest investors in Google.
Google’s Chief Legal Officer served on Uber’s Board of Directors.
It is apparent from public information that Google and Facebook abruptly stopped competing with each other in 2014 and have de facto divided up the digital advertising market since.
The open question here for antitrust authorities to consider and explore, is this apparent American keiretsu dynamic more likely to indicate a pro-competitive or pro-collusion trajectory going forward?
Forewarned is forearmed.
[Originally Published at Precursor]
Vía The Freedom Pub http://ift.tt/2sedcDr
Extending its overnight decline, Bitcoin is now down almost 15% from last week’s highs, back at its lowest since June 16th…
Catalysts for this most recent drop remain unclear but as we noted last night, chatter is focused on uncertainty surrounding SegWit (another potential fork in the codebase) and some looming large ICOs.
via Read More Here..
One month ago, Goldman spotted a curious divergence in the energy sector: whereas in 2015 and 2016, the energy-linked asset class that had the highest beta to crude and was the most impacted as a result of the plunge in oil prices, was debt and specifically junk bonds while equities were relatively resilient to crashing crude prices, in 2017 this relationship had flipped, and – as of mid-May – despite the latest tumble in oil prices, HY Energy credits had returned 2.3% vs. 3.3% for the broader HY index, while Energy equities were down a whopping 9.6%.
And while Goldman made some educated guesses for this abrupt shift in security sentiment, there still is no accepted widely reason for this striking divergence.
One month later, UBS’credit analyst Matthew Mish picked up where Goldman left off, and in a note “Oil bear market: is corporate credit mispriced?” finds that the answer is mostly yes. Just like Goldman, Mish looks at the energy market in 2015 vs. today to answer the key question: “How has US energy changed?” Below we summarize several of his key thoughts:
The health of the energy sector remains critical for corporate credit, directly accounting for 15% & 10% of US high yield and high grade debt outstanding. Average ratings for IG and HY energy indices have shifted less than one notch, but energy defaults have shifted credit quality higher. In comparison to early 2015, the proportion of triple C energy debt is roughly unchanged (11% vs 10%), there is roughly half the exposure to mid and low-single Bs (15% vs 31%) but almost triple the concentration in high single B debt (22% vs 8%). In addition, buoyant debt and equity capital markets have allowed a majority of energy firms to shore up near term liquidity.
But while it’s no secret that energy is the most important component of the energy sector, a better question is how long can this decoupling continue, and at what price of oil will bond contagion finally reemerge. According to UBS the answer is $40/barrel.
12 month WTI at or below $40 will elevate 2015-style risks for HY energy. We estimate a sharp or sustained decline in 12 month WTI below $40 or so (vs mid 40s current) will bring back non-linear downside risks for US HY energy. This is modestly below average breakeven oil prices for HY E&P firms. In addition, almost 30% of firms have only adequate liquidity and are dependent on external financing as hedges roll off.
UBS also highlights something we first noted over a year ago, namely that the recovery rate outlook remains weak due to elevated residual leverage and a greater proportion of secured funding. The Swiss bank calculates that in a $40 oil price scenario in 2018, net leverage would surpass 2016 levels for many global E&Ps, approach peak levels for some NA E&Ps, and approach or exceed prior levels for oily resource plays on average.
So now that the threshold bogey has been found, the next two key questions are why has credit been so resilient to weakness in oil and just as importantly, with volatility is rising, “what causes contagion?”
In answering how its rationalizez the resilience of credit in the face of lower oil, UBS lists three factors:
- First, risky assets correlate more closely with demand or currency-driven oil price changes. We estimate 85-90% of the current weakness is driven by supply.
- Second, financial conditions have also remained accommodative.
- Lastly, market illiquidity and ETF outperformance are pressuring managers to keep holding positions, as investors are not comfortable they can “buy the dip” in a modest selloff.
As for what causes contagion? UBS’s response:
A demand-driven oil selloff that shakes confidence in the $50 – 55 consensus outlook, increasing default and downgrade risks or fund outflows that force ETFs and managers to raise cash from below average levels and reduce short-duration higher quality HY names.
Below we excerpt some more in depth thoughts from the UBS credit strategist:
“Brevity is the soul of wit” Shakespeares
Since late May the material weakness in crude oil prices has brought back a sense of déjà vu to corporate credit markets, particularly US high yield. In this note we attempt to analyze three pivotal questions for investors:
- first, how sensitive are US high grade and high yield credit markets to oil prices now versus the past?
- Second, what is priced into energy and ex-energy credit spreads, and how could credit spreads widen materially and trigger contagion concerns?
- And third, how should investors position portfolios?
Changes in credit market structure have materially impacted the future sensitivity of corporate credit markets to oil prices. Energy remains a large concentration in US HY and IG indices, directly accounting for c$150bn (15%) and c$500bn (10%) of debt outstanding, respectively (down from about 15-20% at peak levels). Average ratings for IG and HY energy indices have shifted less than one notch. However, energy defaults have been severe (in absolute terms and vs fallen angel downgrades), with trailing 12-mo defaults peaking above 25% (Figure 1). As such, the composition and mix of ratings within high yield energy have shifted notably. In comparison to early 2015, the proportion of triple C debt is roughly unchanged (11% vs 10%), there is roughly half the exposure to mid and low-single Bs (15% vs 31%) but almost triple the concentration in high single B debt (22% vs 8%, Figure 2). This is consistent with the number of ‘weakest links’ (those credits rated B- and below on negative outlook and most at risk of default) having declined by 35 – 40%.
There are a few additional salient points. First, while buoyant debt and equity capital market access have allowed a majority of energy firms to shore up near term liquidity, almost 30% of firms have only adequate liquidity and are dependent on external sources of financing, in part because hedges roll off (Figure 3). Second, should default risk rise for lower rated HY issuers, the recovery rate outlook remains weak due to the combination of elevated residual leverage and a greater proportion of secured funding. According to S&P, about 40% of all HY energy issuers, concentrated in lower rated names, will likely realize below (20%) or well below average recoveries (5%) in a stressed scenario (Figure 4). Third, historically HY energy spreads have been very sensitive when longer term oil prices decline below breakeven oil prices (Figures 5, 6).
Finally, we complement the macro analysis with micro perspective by illustrating sensitivity analysis on net leverage for a range of US IG and HY issuers (based on our equity analysts’ estimates). Specifically, we illustrate net leverage by firm using 1) $40 crude prices back in Q1 ’16, 2) current estimated leverage and 3) future leverage estimates based on $40 – 45 oil in 2017 and $35 – 45 oil in 2018. On average results are shown for global E&Ps (primarily crossover credits), North American E&Ps (predominantly high grade), and resource plays across basins (primarily high yield firms). In short, net leverage (Net debt/ EBITDX) is materially lower for global E&Ps (1.8x vs 3.1x), NA E&Ps (2.6x vs 6x), and resource plays (2.9x vs 4.3x) today versus in Q1 ’16 when oil was near $40. In 2017 $40 oil would cause a material rise in net leverage for some issuers, but net leverage on average would still be significantly lower than one year ago.
However, if oil was $45 in 2018, this would cause a more pronounced increase in net leverage for many global E&Ps, NA E&Ps, and the multi-basin resource plays relative to current levels. In a $40 oil price scenario in 2018, this would cause net leverage to surpass 2016 levels for many global E&Ps, approach 2016 levels for some NA E&Ps, and approach or exceed peak levels for oily resource plays on average (Figure 7). Overall, we continue to believe the micro analysis complements our core view that the threshold for a more non-linear reaction in HY energy credit is at $40 or so in longer term oil prices.
Next, some views on the recent moves in the IG/HY markets:
Until the last week, the broader corporate credit market’s reaction has been very muted outside of US high yield energy. US high yield energy spreads have widened by 118bp since mid-March (with oil down about $5), while US HY ex-energy spreads are 17 bp tighter, IG energy spreads are 1bp wider and IG ex-energy spreads are 9bp tighter (Figures 8, 9). The resilience in IG energy spreads, in part, reflects greater concentrations in gas pipelines, which are not directly impacted by lower oil prices, and mid triple B integrated and E&P issuers (which have some cushion against multi-notch downgrades to high yield).
Going back to the key divergence highlighted here, Mish explains that the weakness in HY energy spreads by rating is contained relative to prior years, specifically in lower grades (Figures 10, 11). Further, the resilience in US high yield energy contrasts sharply with falling equity prices and rising marketbased leverage (as proxied by HY median debt to capitalization, Figure 12).
How can traders rationalize the inelastic price performance? UBS answers:
First, we have previously argued that risky asset markets (e.g., global equity markets, industrial metals) correlate more closely with demand or currency-driven oil price changes. In this context, we estimate about 85-90% of the weakness in oil prices is driven by supply, not demand side factors (Figure 13). In recent months, the change in demand side factors has been negative, but currency-related factors have partially mitigated the overall impact. And financial conditions have remained fairly accommodative outside of corporate credit, so the reaction in markets has thus far been limited.
Second, while oil futures and option prices imply a material risk of oil prices at or below $40 through 2018 (Figure 14), we believe credit investors are taking a longer term view and assigning low probabilities to non-base case outcomes given market illiquidity does not allow clients to exit and re-enter positions in times of stress. What could trigger more forced selling? From a narrow perspective, rating downgrades, defaults and fund outflows are three potential triggers. Downgrades (and defaults) are increasingly probable for lower quality HY firms if oil prices stay in the low $40s or head lower. But with the rating agencies pricing in $50 – 55 oil in coming years, it will take a more material shift in sentiment to or below $40 heading into 2018 to trigger material revisions. Further, while we recently started to see material outflows (e.g., c$1.5bn in HY ETF outflows since Wednesday) with lower oil prices, in general, the outflows have been modest in recent months. And similarly HY bond markets, while less active in recent days, have been resilient at lower levels of activity.
Finally, here is why $40 oil is so critical:
“If oil prices fall to $40 or below, the negative impact on rest of world profits (via commodity-related foreign subsidiaries of US companies) could be a material headwind for aggregate corporate profits, and a prolonged $40 oil price would trigger more stress and defaults in lower-quality HY issuers heading into 2018 (and could prompt banks to tighten lending standards on C&I loans at the margin). While lower oil prices should limit upside inflation risks, market expectations for Fed rate hikes are already well below the median path projected by the Fed, suggesting the market is priced for a dovish outcome already. A supply-driven drop in oil prices coupled with resilient equity markets and financial conditions could still have the Fed tighten policy more than the market expects.”
Which is also why $40 oil may be the level at which the Fed officially throws in the towel on further tightening (even though as Dudley explained earlier today there has been no tightening), and starts jawboning the arrival of the next easing cycle.
via Read More Here..
The Path Forward for Blockchain
BlockChain is Fracking, Lateral Drilling, and Globex All Over Again
Before reading please note, these are general musings based on observation and experience. No trade recommendations are offered. You should consider this as an intro into one group’s view of the future.
Based on our collective observations and experience at Soren K. Group we feel as qualified as anyone to opine on the path ahead for Blockchain adaptation and success determiners. One of us has already been publicly dubbed as “expert” in the field of pygmies. We would simply say that our knowledge is based on applying existing models to the field.
What we do understand intimately, especially Soren K, “Bon Scott”, and “Fay Dress”, are that market structure is key to understanding the path of any disruptive industry developments. That helps us handicap the path forward for this new game changing industry. We know how it ends. The trick is understanding the likely path to that end.
We love assessing new developments in old industries like lateral drilling in oil, fracking in Nat Gas, Retail (Amazon made Scaling less important than Networking) and now in Banking we see Blockchain as totally changing its face in the next 10 years. How is dependent on the people at the helms of the industries affected by the new C2C model that blockchain’s enabling of secure individual ledger accounting created.
For now lets briefly focus on the immediate developments in Blockchain and what they broadly imply the potential paths are ahead for the groundbreakers (Bitcoin, Ethereum) and the lurking Tech behemoths (Google, Amazon). it is during these times of disruption that not only do industries reprice themselves but traditional measure menttools like EBITDA etc. are worth less. These also are changing as new realities change the baseline for industry PEs.
It is during these times that conditional analysis and path dependency assessments are king in understanding change. When an industry is growing and its existing markets hare is up for grabs is when knowing market structure and business models helps a lot in protecting yourself.
To do this one must see the relevant models for the industry and their limitations. They are the models governing Network and Scale.
Network Effect and Scalability Models
The business model of cryptocurrencies is based on the Network Effect model. A business that relies on networking is focused on adding users. It doesn’t need to add infrastructure at first and increases in value simply by adding users. Essentially, as a network adds users it grows in value.
The Telephone was a good example. Once the wires were hung, the way to increase a phone company’s stock is to add users. A successfully “networked” business makes its service indispsensible to people. Imagine being the last person in commerce to not have a phone. That businessman would pay a lot for the privilege or risk being excluded from his own business network.
A more recent example is electronic trading. Imagine being the last floor-trader trying to exit a position on a floor where everyone was gone and executing on their E-trade screens. That is pure Network effect.The Network effect is the demand side of the “scalability” model.
A business “scaling” successfully means it can add supply at lower marginal cost (operating leverage). A great example is mining. Once the drilling is done, an increase in supply is basically just adding more variable costs like labor and turning up the speed of extraction. The hole is already dug! But Scalability and Networking both have limitations.
Risks to Both Models
One of the risks to the network model is the ability to grow to accomodate new “traffic”. That means at some point it must add infrastructure. This is fairly easily done compared to other industries. Scaling a network based business is essentially opening up the architecture to other users with computing power. The problem, like in trading exchanges before them is people. And in Bitcoin we will see soon that the people in question are the voting members who control the mining servers and therefore their “fiefdoms”.
Scalability also runs into problems when it has a ton of potential supply it can bring to the market at a low marginal cost but no one wants it. At this point they must acknowledge a need for a greater network to sell to. That means adding salesmen or marketing to raise awareness. Not easily done for any business whose people are “wired” for scale models. Again, the problem is management. Google has none of the issues that Bitcoin may have going forward.
For here, let’s look at Bitcoin’s potential path by using Trading Exchange’s Application of the Networking Business Model. Our analysis shows the businesses are very similar. For now we will cut to the chase.
GLOBEX 2: Enter the Google, Exit the BitCoin
Right now the BitCoin group is running into what we call “floor trader fear”. The voting members are chafing at the idea of scaling their supply by adding servers and/ or server power. This would disrupt their own little empires, not unlike the trading floor fearing Globex back in the day. And so many exchanges held out and protected the floor. And in the end they died. PHLX, AMEX, COMEX, PCOAST, CSCE, all gone or absorbed because they were late to adapt new technology and protect their liquidity pools. If Bitcoin removes power from its voting members control by demutualizing and uses those proceeds to increase server power they will likely excel. But Google and Amazon are now playing and they are all about unlimited server power.
When, not if, those behemoths are up and running they will immediately have an embedded network of both customers AND service providers at their disposal in the form of search eyeballs (google) and buyers (Amazon). They will be set up to crush the opposition if they choose to create their own currency. Imagine Amazon offering amazon money for amazon purchases. Now imagine them offering 20% discounts if you use their money. The choices at this point boggle the mind. Tactical choices thought no longer used will come into play again. Some examples: Freemium, Coupons, Customer Loyalty, Vertical Client Integration (P.O.S.), Travelers checks and more.
To be fair, Google has invested in Bitcoin as well. What smart trader would not hedge himself. But just like Netflix is Amazon’s biggest cloud customer, but will eventually put Netflix out of business (after NetFlix kills Hollywood’s distribution network); So will Google/ Amazon/ Apple attempt to obviate the need for any currency but their own.
Blockchain is the railroad. Amazon and Google have the oil. Like Rockefeller before, The railroad will be made “exclusive” to their products.
Google and Amazon are Already in the Game
Attached is the Daily Blockchain News recap with an example of Google’s foray into Blockchain. The goal here is to introduce their own currency or be brokers of deals using their “search engine” coupons. The coupons are the gateway to their new currency. Exactly how this goes down we do nto know. This post is one example of how it could go down. The bottom line for the big tech companies is how they can lever their networks more efficently and add scale without increasing fixed cost. That comes in the form of levering existing networks with new products geared to cement loyalty. What better way to do this than to have your own money ? What will Home Depot do? WE HONOR AMAZON CASH? meanwhile the plumber, pipes, and sump pump you buy next month will all be through Amazon. And you’ll get a discount by using Amazon cash on your amazon credit card.
Amazon and Google are just a big cash register with all their products at point of sale. Gum, Mints, and People magazine will become Disinfectant, Steam Cleaners, Rugs, and a Local Handy Man. And instread ofaskingfor your loyalty card they will actually take blockchain driven Amazon currency. Remember ATMs? After everyone was on them, they stopped being free.
We feel that BitCoin is going to have problems going forward. They are also best positioned to overcome those problems. But if they do not increase computing power their client base will eventually be relegated to people trying to export their wealth from oppressive regimes. Meanwhile you and I will be buying Nike sneakers on amazon for 20% off because we are now using Amazon cash on our Amazon Credit cards. And Google will also offer similar concepts if you click on one of their paid advertiser links.
Amazon Suggests : Do you want a fidget spinner with your ADD Meds?
How to play it:
This is not short term stuff. When we made retail recommendations on how to play Amazon we could not personally pull the trigger on our own ideas as we were aware of short squeezes adnthings outside our commodity knowledge. But the question we asked ourselves was simple: Would you rather buy Amazon at ATHs or Sears at ATLs. The answer 3 months ago was Amazon. Which means we should haveshorted every retail firm that was not positioning itself to survive. That meant shorting Target. The client did. We did not.
In that vein we are watching closely to see how Banks handle things as well as the usual players. For now; Bitcoin (NYSE) may do very well for years. Second tier players (like AMEX) in crypto will almost certainly go belly up. Amazon and Google (Globex) will destroy certain industries already under pressure when they adopt blockchain. Even energy will be affected. This ties in with the blockchain trades china is doing with Russia for oil deals already going down.
Imagine if Google enters the commodity trading field replacing ISDA and clearinghouses?! Why not? They took themselves public. if one continues monitoring the economic, technological, and Regulatory drivers behind the current market structure, a person can tweak this simple analysis to make their own decisions.
Right now we are looking for new trade ideas in retail to sell short (downstream and upstream) with a 6 month time horizon and looking into shale oil’s increasing balance sheet cannibalism to stay operational (The marketmaker who eventually puts himself out of business).. and as always we are married to Silver and it will be the death of us!!
– Soren K. Group
Current Crypto Prices
Deals, Investments & M&As
Oscar Williams-Grut – Business Insider
Nate Lanxon – Bloomberg
Blockchain, the London-based bitcoin currency service provider, has raised $40 million of fresh funding, representing one of the largest investment rounds in the financial technology sector since Britain’s vote to leave the European Union.
PHILIPP SANDNER, Frankfurt School Blockchain Center:
Big IT companies such as Google have been rather quiet concerning blockchain technology so far. Therefore, this investment is a bold statement.
FAO: And here’s the list: PRIMALBASE, TEZOS, EVEREX, DENT, CIVIC.
Sue Chang – MarketWatch
Bill Gates’s net worth still beats bitcoin’s entire market cap.
FAO: Yeah but he is the richest person in the world….
Sindhuja Balaji – Forbes
The Bitcoin craze is catching on in India. While tech geeks and young investors eye the digital cryptocurrency as its value soars, the government, too, is contemplating a course of action surrounding its regulation.
Exchanges & Trading Venues
Diana Ngo – Coinjournal
Hong Kong’s Open ANX Foundation has unveiled openANX, a project aimed at building a new decentralized cryptocurrency exchange and trading platform built on the Ethereum blockchain.
Stan Higgins – CoinDesk
Coinbase is appealing a court decision from earlier this month in a lawsuit filed on behalf of customers of the now-defunct cryptocurrency exchange Cryptsy.
FAO: Although we are in soft launch, we cover topics globally – we covered this also – here.
Latest Developments & Agreements
The Financial Services Innovation Center is a part of the firm’s global innovation network wavespace, but the key focus is in helping financial services organizations achieve breakthroughs.
Long time the European Union has taken a positive, but wait-and-see attitude towards blockchain and distributed ledger technology. Both related to use cases and regulatory intervention. But that is changing rapidly.
FAO: As I already commented in our sister publication, FinTech Daily News, it’s better late than never for Europe to move this way.
Startups, Accelerators & Hubs
Stan Higgins – CoinDesk
The ethereum blockchain is beginning to show signs it’s being impacted by a new influx of users.
Amid a surge in mainstream media interest, not to mention projects raising funds via ICOs, transaction backlogs were visible on the network. Data from Etherscan shows that more than 300,000 transactions were broadcast on 20th June, the highest amount ever observed on the two-year-old blockchain.
FAO: As I said yesterday, these are just growing pains.
Arjun Kharpal – CNBC
This event doesn’t change the fundamental bullish case for investing in Ethereum. Although, it highlights the risks.
FAO: Risks are part of our daily life. Humanity cannot evolve without people taking some risks…
Camila Russo – Bloomberg
Peter Denious, head of global venture capital at Aberdeen Asset Management Plc, said we’re in the midst of a virtual currency bubble, and like all bubbles, it will eventually burst.
FAO: The stock market changed the economy at the beginning of the last century, and the global stock market crashed in the 1929…you can’t make an omelette without breaking eggs…
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Despite new record highs in stocks, Bloomberg's former FX trader Richard Breslow fears other markets (the dollar's downfall, collapsing rates/curves, crashing commodities) have become too "fatalistic" amid the summer doldrums.
Let’s start with some of the things we know with certainty. Yield curves will keep on flattening. Probably invert and drive home the point to everyone that the Fed committed a dreadful policy mistake. The dollar will never rally again. Just look at the numbers and you have to be a U.S. bear. And look how efficiently the latest European bank bailouts were handled this weekend. They really have their act together. Oil? It’s going to single digits, of course. And there’s nothing you can do to stop it or the carnage it will cause in places like Norway and Canada.
It’s summer, markets have a mind of their own and there’s no percentage in fighting the tape.
In fact it’s odd how fatalistic people seem to be. We used to furiously debate where and when we’d find the canary in the coal mine warning of an imminent market reversal to pounce on. Now, there seems to be blanket resignation that the trend is your master.
But if there’s one thing we do know from experience, it’s that all of these things are capable of turning on a dime. And we need to keep watching for signs of the sine wave shifting.
This coming Friday we’ll get some inflation (or lack thereof) numbers out of Europe and the U.S. For the moment, price data is the most important economic releases we get and have the greatest potential to provoke a reaction. Tame outcomes seem to be the clear base case. Which makes them even more important.
Traders may, at their peril, ignore the message being sent by Chair Yellen when she speaks tomorrow, but the latest HICP and PCE data will speak for themselves. It looks and feels like the Treasury 2s10s is trying to form a base near the 80 basis point level. Where we end the week around this pivot could be important.
Data misses and a Washington horror show have contributed to a really negative vibe surrounding the dollar. The only problem, is that in the last month, the dollar index hasn’t gone anywhere and has spent the past week on the top side of the 21-day moving average. The index, currently near 97.40, will look quite good if it manages a move over 98 and horrid below 96.30.
Oil has more written about it signifying little than any other asset. Why it moves and how far is too often a mere random walk. Its price figures into every econometric forecast and yet no one can credibly predict its movements. We’re six months into the year and WTI has already had five big moves. Extrapolation is a bad idea. For all its whipping around, however, the charts will tell very different stories below $42 and above $44.50.
Most interestingly, Breslow concludes by noting the likes of Mexico, Norway and Canada have taken this “collapse” in oil prices very much in stride, to say the least.
Something the market has given far too little attention to. Or maybe they realize that nothing is forever.
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Anonymous: NASA Is About to Announce the Discovery of Intelligent Alien Life Published on Jun 20, 2017 Latest anonymous message in 2017 just arrived with a huge announcement about the Intelligent Alien Life! NASA says aliens are coming! Many other planets throughout the universe probably hosted intelligent life long before Earth did. Non terrestrial
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