Short Course on Overproduction 4: News Roundup

From the Financial Times, 15 January 2016:

Rio Tinto freezes wages as metal prices plummet

Conserving cash is a business imperative says CEO.

Metal prices at 2005 levels.

 "This situation is not temporary,"  Rio Tinto CEO Sam Walsh.

From The Wall Street Journal, January 15, 2016:

West Canadian Select oil (tar sands oil) discounted to $17.97 per barrel

Meanwhile, the 2012 count of oil rigs in North Dakota averaged 205 rigs in service per month.  In October 2015, the number of rigs in service declined to 68.  Production however has not declined so dramatically.  In 2013, monthly production in North Dakota averaged 35 million barrels.  In October 2015, monthly production was 34.5 million barrels.

The FTWeekend, 16/17 January 2016:

Oil price troubles flare for biggest US banks

Lenders disclose leap in bad loans to energy sector...

Three of the biggest US banks revealed the damage wrought by a plunging oil price this week, disclosing big jumps in costs for bad energy loans and fears of contagion to other portfolios.

[Remember that word "contagion"? Now where have I heard that before? Greece?  Mortgage-backed securities? "Bad" banks?  Good banks?  All banks?  Governments? World markets?] 

Citigroup, the fourth biggest by assets, announced yesterday it had recorded a 32 percent rise in non-performing corporate loans in the fourth quarter from the previous year, mainly related to its North American energy book.

[The "book" is the record or aggregation of financial positions, exposures-- loans, assets, etc-- that the bank has engaged in the conduct of its business, except of course when such positions are "off the books" or are "off-balance sheet" structured investment vehicles]

Wells Fargo, the number three by assets said that net charges came to $831 million in the period up from $731 in the third quarter mainly due to oil and gas.

A day earlier JP Morgan Chase, the number one, "said it was watching closely" for spillover effects.  If oil stayed around present levels of $30 a barrel, it said it would be forced to add up to $750 million in loan reserves this year-- roughly one-third of the benefit it expects from higher net interest income.....

Jamie Dimon, chairman and chief executive of JP Morgan [which has agreed to some $33 billion in fines and penalties for violations of banking and securities regulations] was on the back foot responding to a barrage of energy-related questions...."Remember," he said, "these are asset-backed loans.  A corporate bankruptcy doesn't mean your loan is bad."

Priceless, no?  "These are asset-backed loans..." says the man, reading from the Bear Stearns, Countrywide, Merrill Lynch, Wachovia, Washington Mutual, AIG, RBS, Banca Monte Dei Paschi di Siena, AngoIrish, Banco Espirito Santo, playbook.  Anybody recall all the loans all those institutions did NOT have on their books?  All those asset-backed loans? 

When the assets cannot be accessed profitably, turned-over, guess what, Jamie?  Your loan is bad.  Bad to the bone.

But let's be clear, this is not a replay of 2007-2008.  Energy loans make up about 4 percent of the bankers' "book."   Increasing loan loss provisions to 2 or 3 or 10 billion dollars involves serious money, but the mass of non-performing loans 8 years ago was measured in the hundreds of billions, and even at the one trillion mark in the US alone.

This also doesn't mean that another recession isn't going to occur.  It will, and will have its origin in the same forces that produced the contraction of 2007-2009.  But this one will manifest itself differently.

Finally:

"People hate banks and they want to see them suffer," said Dick Bove, analyst at Rafferty Capital Markets.

Yeah, ain't that the truth?  Me, I'm a humanist.  I don't want to see them suffer.  I just want to see them dead. 


S.Artesian
January 17, 2016