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The Fed Is Preparing for Negative Rates—Here’s the Sign Everyone Missed

Submitted by John Mauldin via MauldinEconomics.com,

I think it’s possible that the Fed will push rates below zero when the next recession arrives.

I explained why a few months ago in my free weekly column, Thoughts from the Frontline, at Mauldin Economics.

In that regard, something important happened recently. And not many people noticed. I’ll do a quick review to explain.

In Congressional testimony last February, a member of Congress asked Janet Yellen if the Fed had legal authority to use negative interest rates. Her answer was this:

In the spirit of prudent planning we always try to look at what options we would have available to us, either if we needed to tighten policy more rapidly than we expect or the opposite. So we would take a look at [negative rates]. The legal issues I’m not prepared to tell you have been thoroughly examined at this point. I am not aware of anything that would prevent [the Fed from taking interest rates into negative territory]. But I am saying we have not fully investigated the legal issues.

So as of then, Yellen had no firm answer either way.

A few weeks later, she sent a letter to Rep. Brad Sherman (D-CA). He had asked what the Fed intended to do in the next recession and whether it had authority to implement negative rates.

She did not directly answer the legality question, but Sherman took the response to mean that the Fed thought it had the authority. Yellen noted in the letter that negative rates elsewhere seemed to be having an effect.

(I agree that they are having an effect; it’s just that I don’t think it’s a good one.)

Yellen’s claims are a clear sign the Fed is prepared to dive

Fast-forward a few more weeks to Yellen’s June 21 congressional appearance. She stated that the Fed does have legal authority to use negative rates but denied any intent to do so.

“We don’t think we are going to have to provide accommodation, and if we do, [negative rates] is not something on our list.”

 I’m concerned about the legal authority question. If we are to believe Yellen’s sworn testimony to Congress, we know three things:
  1. As of February, Yellen had not “fully investigated” the legal issues of negative rates.
  2. As of May, Yellen was unwilling to state the Fed had legal authority to go negative.
  3. As of June, Yellen had no doubt the Fed could legally go negative.

When I wrote about this in February, I said the Fed’s legal staff should be disbarred if they hadn’t investigated these legal issues. Clearly they had.

Bottom line: by putting the legal authority question to rest, the Fed is laying the groundwork for taking rates below zero.

I’m sure Yellen was telling the truth when she said in June that the Fed had no such plan. But, plans change.

The Fed says it’s data dependent. If the data shows we’re in recession, I think it is very possible the Fed will turn to negative rates to boost the economy.

Except, in my opinion, it won’t work.

Posted in News and Events by admin on August 1, 2016.
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Oil Jumps Despite Saudi Plans For “Significant Output Growth”; Kuwait Unveils Plans For Record Production Surge

A day after oil tumbled to the lowest level in weeks, it has once again started to climb, ignoring the changing dynamic in the oilsands region where the fire has now moved away from critical Canadian oil infrastructure, and is instead focusing on concerns about supply disruptions not just out of Canada but also a series of attacks on Nigeria’s oil infrastructure which pushed the country’s crude output close to a 22-year, cumulatively knocking out 2.5 million barrels of daily production.

However, two stories that oil traders are ignoring in today’s action is the latest out of Saudi Arabia where Saudi Aramco, the state oil company, announced it was raising production to capture more customers as it pushes ahead with what could be the world’s biggest stock market listing next year the FT reported earlier. Additionally, Kuwait’s head of research at state-owned Kuwait Petroleum said the country aims to produc a record 4 million a barrels a day by 2020, a major increase of nearly 50% compared to its recent 2.8mmbpd output recorded in March.

FOMC minutes released

First, back to Saudi Arabia, where in some of the first comments since a major government reshuffle at the weekend, Saudi Aramco chief executive Amin Nasser emphasized the company’s willingness to compete with rivals, putting oil producers from regional adversary Iran to US shale producers on notice.

“Whatever the call on Saudi Aramco, we will meet it,” he said during a rare media visit to the headquarters of the state oil company in Dhahran. “There will always be a need for additional production. Production will increase upward in 2016.”

As we noted over the weekend when analyzing the recent Saudi oil minister succession, Mohammed bin Salman, deputy crown prince, hinted that

the kingdom could easily accelerate output to more than 11m b/d as Iran, Riyadh’s regional rival, tries to attract customers after years of sanctions. Saudi Aramco, which pumps more than one in every eight barrels of crude globally, is at center of a reform program being pushed by Prince Mohammed, who has emerged as the man holding the main levers of power in Saudi Arabia.

Last year Saudi Arabia’s crude output averaged 10.2m b/d, Mr Nasser said, the highest annual level on record. He indicated the increase in 2016 would supplant high-cost output in other parts of the world, which has started to decline after almost two years of falling prices. “We are seeing a global increase in demand,” said Mr Nasser, citing growing consumption in India, the US and other parts of the world. He was explicitly focusing on China where as noted before, the Saudis have lost substantial ground to Russian exports and are rushing to retake market share as Chinese teapot refineries have boosted production in recent months.

As the FT adds, Nasser did not specify how much Aramco’s production will rise in 2016, but said the company was prepared to meet additional domestic demand this summer, when the country’s output usually rises to meet heightened domestic electricity demand as the use of air-conditioning soars. Last June production reached a high of 10.56m b/d.

Nasser added that Saudi Arabia’s production capacity was 12.5m b/d with all but 500,000 b/d controlled by Aramco. He also said that the latest stage of an expansion project at the Shaybah oilfield in the south-east would be finished in a couple of weeks, adding 250,000 b/d of production capacity and taking the field’s output to 1m b/d. This would help offset falling output at other, mature fields.

But while the Saudi production boost remains speculative, another OPEC member nation that is set to see its output soar in

the coming months is Kuwait, which is targeting an almost 50% increase in oil production over the next four years in a bid to secure future economic growth for the oil-dependent nation, a Kuwaiti oil official said on Tuesday.

Speaking at the Platts Crude Oil Summit in London, Abdulaziz Al Attar, head of research at state-owned Kuwait Petroleum Corp., said the country aims at producing 4 million a barrels a day by 2020 and maintaining that level through 2030, reiterating its goal of ramping up production.

According to MarketWatch, such an increase would mark a 44% jump on Kuwait’s output of 2.77 million barrels a day in March, according to the latest monthly report from OPEC. It would also be the country’s highest output level ever, according to Bloomberg data. “We also intend to provide fuel stock capabilities to counter for seasonality and domestic energy demand,” Al Attar said at the conference.

The comments come after a three-day strike in Kuwait sent its oil production tumbling to 1.5 million a day in April. However, Al Attar brushed off concerns that similar events would significantly impact production in the future. “I don’t think there will be any future risks of strikes,” he said. The oil representative said Kuwait plans to grow domestic refining capacity to 1.4 million barrels a day and boost international cooperation.

So while the world awaits that elusive jump in demand which is the catalyst for all this upcoming excess production, in the meantime oil continues to pile up. And, as Reuters, writes, with plenty of crude available, refiners have produced large volumes of gasoline and diesel, threatening to swamp demand despite the coming U.S. summer driving season.

According to Oystein Berentsen, managing director for crude at Strong Petroleum in Singapore, “crude cannot go up without support from products, and that support is not there at the moment, and more refineries are coming out of turnarounds so there will be more products and tanks are getting full.

For now, however, oil is doing precisely that, going up as algos have resumed control over the trend and supply/demand imbalance fundamentals have been put squarely away for the time being.

Article source: http://www.zerohedge.com/news/2016-05-10/oil-jumps-despite-saudi-plans-significant-output-growth-kuwait-unveils-plans-record-

Posted in News and Events by admin on May 24, 2016.
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