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Mlodj

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When the price of oil seemingly stepped through the looking glass Monday and tumbled into negative value, it summoned up an image of the world of petroleum turned wrong-side-round.  In theory it meant that sellers would have to pay buyers $40 or more just to take a barrel of what used to be called Black Gold off their hands.  It was fleeting, and symbolic, more than anything, and it won't have much effect on the price of gasoline at the pump. But it also showed just how much the coronavirus pandemic has crushed the world's energy markets — and how the global effort to stabilize them was failing.

But the notion that a barrel of oil could be worth less than zero was a shock to many.  It was a vivid symptom of the ailments of the oil business, which will probably hit American oil producers the hardest. The oil giants of Saudi Arabia and Russia are state-run conglomerates, capitalizing on cheap oil and able to put national policy ahead of profits if need be. Monday's price was a warning to American companies that the markets they supply are rapidly deflating.  It comes even as major oil companies have cut back spending on new wells by 30% to 50%, and oil field service companies have been laying off more and more workers. Some companies have started to shut in their wells, taking a serious hit to their finances.

The negative price recorded on Monday was in one sense a short-term anomaly, according to analysts with S&P Global Platts, a commodities analysis firm. It had to do with a specific supply of oil — West Texas Intermediate — and was tied up with the closing of the contract period for May delivery of oil at a time when few need more petroleum.  The June delivery price for oil was up slightly Monday, to just over $20. That means that by late spring, traders are betting that oil will still have some value.  Yet even if that June price holds steady — it was hovering around $20 Monday — it is still down about 65% this year, and over time it would devastate North American shale and sand tar companies.  "Whether June contract is fairly priced or has downside, the price is TERRIBLE," tweeted Abhi Rajendran, of the Center on Global Energy Policy at Columbia University. "Time to wake up to the possibility of 2-3 mil bpd [million barrels per day] or more of US oil supply gone in a month. Could be talking about 3-4."

An economist at the University of Notre Dame doubts that that June price will hold steady. The June and July future prices reflect increased demand for gasoline and jet fuel, said Gianna Bern, but she noted that demand in the transport sector is "at a standstill."  "In the coming days," she said, "I think we could see a weak WTI June contract."

Few want oil in May because there is hardly anywhere to put it. That's why speculators who held contracts for May delivery — contracts that in a normal month they would have sold to refineries at the last minute — were left with few options Monday but to swallow the losses. One factor not reflected in the tumbling price, though, is that trading was light throughout the day.  Starting in January, the pandemic led to a gradual and then sudden shutdown of the world economy, so that demand is now an estimated 25% to 30% below what it was. But oil-producing nations kept pumping through March and into early April as the Saudis and Russians tried to bluff each other into cutting production, and storage capacity has neared the brink. What little is left has been tied down with leases.  On April 12, both sides, together with the other main members of the Organization of the Petroleum Exporting Countries, agreed to cut production by a purported 10 million barrels a day, or about 10% of global output. But that still is less than the decline in consumption, and stocks have kept growing.

"This moment is of course historical, and could not better illustrate the price-utopia that the market has been in since March, when the full scale of the oversupply problem started to become evident but the market remained oblivious," Louise Dickson of Rystad Energy wrote in a note. "Since then traders have sent prices up and down on speculation, hopes, tweets and wishful thinking. But now reality is sinking in."  That agreement was hailed by President Donald Trump as a victory that would right the price of oil and save American oil-related jobs.

Worsening the pain for American producers is a small fleet of tankers leased by the Saudis before the price war was called off and heading to the United States loaded with Saudi crude, according to reports. It would represent seven times the usual amount of oil that Saudi Arabia ships here in a typical month, and it comes even as the United States, which had regained its status as an oil exporter last year, has seen its export markets crumble.  "Today's collapse poses a devastating threat to our oil and gas sector, with job losses in the thousands and national security being weakened if the industry cannot recover," Sen. Kevin Cramer, R-N.D., said in a statement issued by his office Monday. "The dramatic low underscores why we cannot allow Saudi Arabia to flood the market, especially given our storage capacity dwindling. Right now, the highest number of Saudi oil tankers in years is on its way to our shores. Given today's news, I call on President Trump to prevent them from unloading in the United States."

North Dakota is a major oil producing state, sitting atop the Bakken shale formation, but the break-even price there is as much as $45 per barrel.  Nothing like this happened in the worst of the Depression, or in the early years of the Civil War, the two previous low points for petroleum, according to Bob McNally, head of the Rapidan Energy Group.  Canadian oil companies, which were not parties to the OPEC-Russia agreement, have started to shut in the wells in the sand-tar regions of Alberta. There, too, oil was trading in negative amounts Monday.  "Shutting-in production is a very painful decision for an operator to make — often the economics support running a well at a loss for a certain period of time rather than shutting down the project completely,” said Teodora Cowie, senior oil market analyst at Rystad Energy. "But with infrastructure constraints, this is no longer an option for many landlocked producers.”

"The market is starting the painful process of balancing supply against a smaller demand outlook of about 70 million bpd,” wrote Reid Morrison, an energy analyst with PwC. "The economic situation is locked up with no real clarity about what lies ahead, so there’s no reason to expect demand to increase over the near term.”

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Just filled up the car at 59.9 cents a gallon.  :groovy:

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36 minutes ago, Mlodj said:

Just filled up the car at 59.9 cents a gallon.  :groovy:

Where? Saudi Arabia? 😆

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8 minutes ago, lynched1 said:

Where? Saudi Arabia? 😆

Kroger.  Some of their grocery stores have gas stations attached, and you can build up discounts shopping there, so we got a dollar a gallon discount.

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West Texas Intermediate, the oil grade most associated with American production, plunged down to -$40 April 20. You read the right. For a while yesterday, sellers had to pay people forty bucks to take a barrel of crude.  As with any product, the business of oil isn’t a once-and-done. It must be produced, shipped and processed, and then the refined product must be shipped and retailed. What happened April 20 is a bottleneck in that process. Production surged ahead of pipeline shipping capacity, leaving some producers with nowhere to put their crude.  The real kicker is that this is not the "negative prices” outcome I predicted a couple weeks back. "All” the April 20 event was was a single facility in a single country running out of future leased storage capacity for the month of May. The April 20 price crash will happen again in the same place and it will be bigger: June WTI futures contracts are now spazzing, and America’s Cushing oil storage and transport nexus undoubtedly will be actually full by then. But even this is nothing but the warmup for the big show.

That will happen when the world runs out of storage.
 
Numbers are fuzzy in this corner of global oil markets. In part because everyone classifies and categories their oil storage capacity differently. In part because they should (gasoline storage is functionally different from raw oil storage). In part because some countries don’t share data because they’re lazy or secretive. But no one thinks there’s a whole lot of storage capacity left. Global oversupply of crude right now is over 20mpbd (with 30mbpd seeming to be the "average” guestimate). Most folks in the know are now musing that what storage remains will be filled up completely sometime in May or early-June.  And filled up it will be, because that is the express goal of the world’s largest oil exporter, Saudi Arabia. The Saudi price war started out as a spat with the Russians over carrying the burden of a production cut. It has since expanded into the Saudis targeting the end markets of every single one of what the Saudis’ consider to be inefficient producers. The Saudis are directly targeting markets previously serviced not just by US shale and Russian, but those serviced by Kazakhstan and Azerbaijan and Libya and Iraq and Iran and Malaysia and Indonesia and Mexico and Norway and the United Kingdom and Nigeria and Chad and you get the idea.
 
As of this morning, there are still at least 24 supertankers carrying at least 50 million barrels of Saudi crude en route to the U.S. Gulf Coast. Most will arrive in May, seeking to fill up as much of what remains of U.S. storage as possible. Similar volumes are in route to Europe and even bigger volumes to Northeast Asia. In most cases the destinations are the transshipment nodes that enable distribution of inland-produced oil to coastal locations: Rotterdam, Suez, Singapore, Korea.  Assuming you’ve got deep pockets, and Saudi Arabia’s are some of the world’s deepest, it isn’t a stupid strategy. If the Saudis can push prices firmly negative, it will absolutely crush many of the world’s energy producers. My back-of-envelope math suggest some 20 million barrels per day of production capacity – one-fifth of global output – will go offline for years. And then Riyadh will have what it wants: the ability to raise prices as much as it wants and to reign supreme over the world of oil for at least several years. (There are still a veritable swarm of flies that will need to be dealt with in that particular ointment, but the Saudi plan seems sure of generating plenty of ointment nonetheless.)

The WTI price crash on April 20 confirms that if the Saudis didn’t realize the potential for their strategy’s explosive success before, they certainly do now. They have no reason to back down.
 
There are a few producers worthy of callouts.

Canada’s Alberta province has the most to lose. Not only landlocked, it must sell all its oil into the American market that is already so saturated. Its production must be shut in for years.

Venezuela was facing civilizational collapse due to mismanagement before oil prices tanked. As oil is the government’s only remaining income stream, this marks the end of Vene as a country.  Its oil will not come back for at least a decade, and even then only if an outside power first physically invades the place to rebuild the country from scratch.

America’s sanctions regime against Iran has been so successful the country isn’t an oil exporter any longer. Its output will absolutely collapse this summer, and the country lacks the funds to bring in foreigners to help restart it or the skills to do the work itself.

Russian fields are in swamps and permafrost. Drilling is only possible during the winter. Any shut-ins means the wells freeze solid, necessitating completely new drilling. Last time this happened it took the Russians nearly 15 years to get production back.

Azerbaijan and Kazakhstan are both dependent upon other countries (in some cases, Russia) to transit their crude to market. High production costs plus finicky neighbors equals long-haul shut-ins.

Nigeria is a mess on a good day, and the supermajors who have made Nigerian output possible have steadily moved offshore to get away from the chaos and violence. Once they turn off their wells, they won’t even consider returning until global prices rise to the point that they are once again willing to subject their staff to frequent kidnapping. That’s several years off.

Iraq has been in a state of near civil war for some 15 years. The country is now producing over 4mbpd, the income of which helps hold the place together. Negative prices will remove the "near” from the country’s political condition and (at best) make the place a ward of the Arab states of the Persian Gulf.

It is also worth noting that the speed that this could all go from head-spinning to head-chopping is intensely short. Right now there’s still a fair amount of spare oil tankers to shuttle about the world. The Saudis have been leasing out every tanker they can find, so before long all the the world’s tankers will be full as well.  Oil has been a panacea for all sorts of inefficient, compromised, and in some cases evil regimes for decades. Huge demand in the West and Northeast Asia allowed a raft of previously insignificant or morally reprehensible leaders and societal situations to effectively print dollars out of the ground and count the industrialized world as a hungry customer. Not anymore. Demand patterns have shifted, the United States is now an exporter of crude oil and products, and the petro-economy that has kept ayatollahs and ideologues afloat is crumbling. Before anyone cheers it’s worth remembering that things will get a lot uglier before they have any hope of improving.

 


 

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Japan allocates billions to pay manufacturing firms to leave China

The Japanese government has allocated billions of dollars in a stimulus package to help manufacturers move production out of China and into other countries.

The stimulus package, which is to offset the financial hit of the coronavirus, includes 220 billion yen, or $2.2 billion, for companies shifting production from China back to Japan, and 23.5 billion yen for companies to shift to other nations, according to Bloomberg.

"There will be something of a shift,” said Shinichi Seki, an economist at the Japan Research Institute. "Having this in the budget will definitely provide an impetus.” Companies that manufacture for the Chinese market, such as car makers, will likely remain, he said.

The move comes as Japanese Prime Minister Shinzo Abe attempts to establish friendlier ties with China. A meeting between Abe and Chinese President Xi Jinping was slated for earlier this month in Japan, what would have been the first state visit in a decade, was postponed due to the coronavirus pandemic.

"We are doing our best to resume economic development,” Chinese Foreign Ministry spokesman Zhao Lijian said at a briefing Wednesday in Beijing when asked about the two countries’ relationship. "In this process, we hope other countries will act like China and take proper measures to ensure the world economy will be impacted as little as possible and to ensure that supply chains are impacted as little as possible.”

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The trustees of the Social Security Administration released their annual report on the program's long-term solvency on Wednesday—but the report is likely already out of date since it doesn't take into account the sharp economic downturn triggered by the COVID-19 pandemic.  Even without the pandemic factoring into the calculations, Social Security is heading for insolvency by 2035, the report says. That doesn't mean the program will be bankrupt, but it represents the date when Social Security's reserves would be used up and mandatory benefit cuts would be instituted across the board. If nothing is done to shore up Social Security, current projections anticipate that beneficiaries will receive only 79 percent of expected benefits, with further cuts needed in future years. 

Fifteen years might seem like a long time, but it's really not. Anyone over age 50 today is likely facing the prospect of benefit cuts happening before they retire.  And, again, that doesn't account for the current economic crisis.  If the coronavirus results in economic losses of 15 percent for the current year, the program would likely face insolvency by 2034, says Stephen Goss, chief actuary for the Social Security Administration. Another year of losses would move that date even closer.  "We just don't know if we're going to be back to normal this year, next year, or when," Goss said Thursday during an event hosted by the Bipartisan Policy Center, a centrist think tank.  And if the coronavirus response triggers a long-term recession, the urgency of Social Security's status becomes more apparent. According to a projection from the Bipartisan Policy Institute, another recession of the length and depth of the so-called Great Recession that followed the 2008 market crash would cause Social Security to face insolvency before the end of the current decade.

 

SocialSecurity-1024x706.jpg

"This is a concerning report, even before the virus crisis hit," says Charles Blahous, senior research strategist for the free market Mercatus Center and a former trustee for Social Security.  More important than the projected dates for insolvency, he says, is the question of how severe the shortfall will be and how long Congress has to act before it arrives. The coronavirus will likely mean a larger fiscal problem and less time to address it.  As I wrote at this same time last year, the problem facing Social Security is really one of time more than money. If changes can be phased in over a longer period of time, they will be less likely to disrupt retirement plans for current workers or beneficiaries. The last time Congress enacted substantial changes to Social Security was in 1983, and those changes won't be fully adopted until 2027.  It should be obvious that the longer Congress waits to act, the less time will be available for a gradual adjustment.

Any reforms should also consider two systemic problems within the Social Security system. When Social Security launched in 1935, the average life expectancy for Americans was 61. That means the average person died four years before qualifying for benefits. It was imagined as a safety net for the truly needy, not a conveyor belt to transfer wealth from the younger, working population to the older, relatively wealthier retired population.  As a result, the worker-to-beneficiary ratio has shifted dramatically. Last year, there were 64 million Americans getting benefits from Social Security, while 178 million people paid into the system via payroll taxes, according to the trustees' report. That's less than three workers for every beneficiary, a near-historic low.  Congress is going to have to consider all available options, says Blahous. That means changing eligibility ages, moderating benefit growth, and probably hiking payroll taxes too. "We're not going to have enough from any one of those pots by themselves to be able to close the shortfall," says Blahous, "and that's even before taking into account the worsening that is going to occur as a result of this year's economic slowdown."

 

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WASHINGTON/LONDON/DUBAI (Reuters) - As the United States pressed Saudi Arabia to end its oil price war with Russia, President Donald Trump gave Saudi leaders an ultimatum.  In an April 2 phone call, Trump told Saudi Crown Prince Mohammed bin Salman that unless the Organization of the Petroleum Exporting Countries (OPEC) started cutting oil production, he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the kingdom, four sources familiar with the matter told Reuters.  The threat to upend a 75-year strategic alliance, which has not been previously reported, was central to the U.S. pressure campaign that led to a landmark global deal to slash oil supply as demand collapsed in the coronavirus pandemic - scoring a diplomatic victory for the White House.  Trump delivered the message to the crown prince 10 days before the announcement of production cuts. The kingdom’s de facto leader was so taken aback by the threat that he ordered his aides out of the room so he could continue the discussion in private, according to a U.S. source who was briefed on the discussion by senior administration officials.

The effort illustrated Trump’s strong desire to protect the U.S. oil industry from a historic price meltdown as governments shut down economies worldwide to fight the virus. It also reflected a telling reversal of Trump’s longstanding criticism of the oil cartel, which he has blasted for raising energy costs for Americans with supply cuts that usually lead to higher gasoline prices. Now, Trump was asking OPEC to slash output.  A senior U.S. official told Reuters that the administration notified Saudi leaders that, without production cuts, "there would be no way to stop the U.S. Congress from imposing restrictions that could lead to a withdrawal of U.S. forces.” The official summed up the argument, made through various diplomatic channels, as telling Saudi leaders: "We are defending your industry while you’re destroying ours.”

Reuters asked Trump about the talks in an interview Wednesday evening at the White House, at which the president addressed a range of topics involving the pandemic. Asked if he told the crown prince that the U.S. might pull forces out of Saudi Arabia, Trump said, "I didn’t have to tell him.”  "I thought he and President Putin, Vladimir Putin, were very reasonable,” Trump said. "They knew they had a problem, and then this happened.”  Asked what he told the Crown Prince Mohammed, Trump said: "They were having a hard time making a deal. And I met telephonically with him, and we were able to reach a deal” for production cuts, Trump said.

Saudi Arabia’s government media office did not respond to a request for comment. A Saudi official who asked not to be named stressed that the agreement represented the will of all countries in the so-called OPEC+ group of oil-producing nations, which includes OPEC plus a coalition led by Russia.  "Saudi Arabia, the United States and Russia have played an important role in the OPEC+ oil cut agreement, but without the cooperation of the 23 countries who took part in the agreement, it would not have happened,” said the Saudi official, who declined to comment on the discussions between U.S. and Saudi leaders.

The week before Trump’s phone call with Crown Prince Mohammed, U.S. Republican Senators Kevin Cramer and Dan Sullivan had introduced legislation to remove all U.S. troops, Patriot missiles and anti-missile defense systems from the kingdom unless Saudi Arabia cut oil output. Support for the measure was gaining momentum amid Congressional anger over the ill-timed Saudi-Russia oil price war. The kingdom had opened up the taps in April, unleashing a flood of crude into the global supply after Russia refused to deepen production cuts in line with an earlier OPEC supply pact.  On April 12, under pressure from Trump, the world’s biggest oil-producing nations outside the United States agreed to the largest production cut ever negotiated. OPEC, Russia and other allied producers slashed production by 9.7 million barrels per day (bpd), or about 10% of global output. Half that volume came from cuts of 2.5 million bpd each by Saudi Arabia and Russia, whose budgets depend on high oil-and-gas revenues.

Despite the agreement to cut a tenth of global production, oil prices continued to fall to historic lows. U.S. oil futures dropped below $0 last week as sellers paid buyers to avoid taking delivery of oil they had no place to store. Brent futures, the global oil benchmark, fell towards $15 per barrel - a level not seen since the 1999 oil price crash – from as high as $70 at the start of the year.  The deal for supply cuts could eventually boost prices, however, as governments worldwide start to open their economies and fuel demand rises with increased travel. Whatever the impact, the negotiations mark an extraordinary display of U.S. influence over global oil output.  Cramer, the Republican senator from North Dakota, told Reuters he spoke to Trump about the legislation to withdraw U.S. military protection from Saudi Arabia on March 30, three days before the president called Crown Prince Mohammed.  Asked whether Trump told Saudi Arabia it could lose U.S. military support, U.S. Energy Secretary Dan Brouillette told Reuters the president reserved the right to use every tool to protect U.S. producers, including "our support for their defense needs.”

The strategic partnership dates back to 1945, when President Franklin D. Roosevelt met with Saudi King Abdul Aziz Ibn Saud on the USS Quincy, a Navy cruiser. They reached a deal: U.S. military protection in exchange for access to Saudi oil reserves. Today, the United States has about three thousand troops in the country, and the U.S. Navy’s Fifth Fleet protects oil exports from the region.  Saudi Arabia relies on the United States for weapons and protection against regional rivals such as Iran. The kingdom’s vulnerabilities, however, were exposed late last year in an attack by 18 drones and three missiles on key Saudi oil facilities. Washington blamed Iran; Tehran denied it.

THIRTEEN ANGRY SENATORS

Trump initially welcomed lower oil prices, saying cheap gasoline prices were akin to a tax cut for drivers.  That changed after Saudi Arabia announced in mid-March it would pump a record 12.3 million bpd – unleashing the price war with Russia. The explosion of supply came as governments worldwide issued stay-home orders - crushing fuel demand - and made clear that U.S. oil companies would be hit hard in the crude price collapse. Senators from U.S. oil states were infuriated.  On March 16, Cramer was among 13 Republican senators who sent a letter to Crown Prince Mohammed reminding him of Saudi Arabia’s strategic reliance on Washington. The group also urged Commerce Secretary Wilbur Ross to investigate whether Saudi Arabia and Russia were breaking international trade laws by flooding the U.S. market with oil.

On March 18, the senators – a group that included Sullivan of Alaska and Ted Cruz of Texas – held a rare call with Princess Reema bint Bandar bin Sultan, the Saudi ambassador to the United States. Cramer called the conversations "brutal” as each senator detailed the damage to their states’ oil industries.  "She heard it from every senator; there was nobody that held back,” Cramer told Reuters.  The Saudi embassy did not respond to requests for comment.  Cramer said the princess relayed their comments to officials in Saudi Arabia, including the energy minister. The senators told the princess that the kingdom faced rising opposition in the Senate to the Saudi-led coalition that is waging a war in Yemen against Houthi rebels.  Saudi and U.S. officials have said the Houthis are armed by Iran, which Tehran denies. The backing of Senate Republicans over Yemen had proved crucial for Saudi Arabia last year. The Senate upheld Trump vetoes of several measures seeking to end U.S. weapons sales and other military support to Saudi Arabia amid outrage over the Yemen conflict, which has caused more than 100,000 deaths and triggered a humanitarian crisis.  Cramer said he made a phone call to Trump on March 30, about a week after he and Sullivan introduced their bill to pull U.S. troops from Saudi Arabia. The president called Cramer back the same day with Energy Secretary Brouillette, senior economic adviser Larry Kudlow and U.S. Trade Representative Robert Lighthizer on the call, the senator said.  "I said the one person that you don’t have on the call that can be very helpful is Mark Esper,” the defense secretary, Cramer recounted, saying he wanted Esper to address how U.S. military assets in Saudi Arabia might be moved elsewhere in the region to protect U.S. troops.  The Pentagon did not respond to a request for comment on whether Esper was involved in discussions of pulling military assets out of Saudi Arabia.

BENDING THE KNEE

Trump’s oil diplomacy came in a whirlwind of calls with Saudi King Salman, Crown Prince Mohammed and Russian President Vladimir Putin starting in mid-March. The Kremlin confirmed Putin’s conversation with Trump and said they discussed both oil supply cuts and the coronavirus pandemic.  On the April 2 call with Prince Mohammed, Trump told the Saudi ruler he was going to "cut them off” the next time Congress pushed a proposal to end Washington’s defense of the kingdom, according to the source with knowledge of the call. Trump also publicly threatened in early April to impose tariffs on oil imports from Saudi Arabia and Russia.  After the conversation with the Saudi crown prince, and another the same day with Putin, Trump tweeted that he expected Saudi Arabia and Russia to cut output by about 10 million barrels, which "will be GREAT for the oil & gas industry!”   Riyadh and Moscow later confirmed they had restarted negotiations.

On April 3, Trump hosted a meeting at the White House with senators Cramer, Cruz, and Sullivan, and oil executives from companies including Exxon Mobil Corp, Chevron Corp, Occidental Petroleum Corp and Continental Resources.  During the public portion of the meeting, Cramer told Trump that Washington can use the billions of dollars it spends defending Saudi Arabia on other military priorities "if our friends are going to treat us this way.”  The prospect of losing U.S. military protection made the royal family "bend at the knees” and bow to Trump’s demands, a Middle Eastern diplomat told Reuters.  After prolonged and fractious negotiations, top producers pledged their record output cut of 9.7 million bpd in May and June, with the understanding that economic forces would lead to about 10 million bpd in further cuts in production from other countries, including the United States and Canada.  Trump hailed the deal and cast himself as its broker. "Having been involved in the negotiations, to put it mildly, the number that OPEC+ is looking to cut is 20 Million Barrels a day…” he tweeted shortly after the deal.  Riyadh also took credit. Saudi energy minister Prince Abdulaziz told Reuters at the time that the crown prince had been "instrumental in formulating this deal.”

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Already talk of raising taxes by Murphy and Philly mayor, majority of people are going to be living in poverty  soon.

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1 hour ago, Joe Hunter 73 said:

Already talk of raising taxes by Murphy and Philly mayor, majority of people are going to be living in poverty  soon.

Someone needs to give them a crash course on recent Greek history. 

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In the past five weeks the United States has thrown $3 trillion in new government spending at coronavirus-related bailouts, relief and economic stimulus. In total the US has already spent more on coronavirus-related actions than the rest of the world combined, tripled. Strangest of all, not one dime of it is backed up by new government revenue streams; every bit is deficit spending.  Nor is the United States likely to overly suffer from the expansion of its debt burden. Of that $3 trillion in new spending, the Federal Reserve’s total purchases of US debt is "only” $1.3 trillion. The rest of the debt bulk has been absorbed by other investors, mostly foreign investors. Such is the scare globally that many are eager to get a zero rate of return on an American government asset rather than risk their money at home.  Nor is the United States even remotely done. At least another $1.5 trillion is on deck for May, with another batch likely during the summer. None of this includes any of the monetary policy actions from the Federal Reserve, nor does it include likely inducements for American firms to relocate from China to literally anywhere else.

The feeling in the United States is that coronavirus is not only a crisis, but it is the type of crisis which necessitates heretofore unprecedented government action. And since government action isn’t free, everyone is willing to go along with big price tags. This feeling is strikingly bipartisan. In the first two week of the coronavirus crisis, Congress passed more legislation of substance than in the previous ten years. I’m not suggesting for a moment that American politics have entered a kumbaya moment, but instead that the very concept that price means anything has passed into myth. And if my broad forecasts for the future of Europe and China hold true, it will stay there for years to come.

 There’s a political side to this willingness to throw a bottomless pot of money at the problem as well.

America’s political parties are in flux. Factions rise and fall in the hierarchies, and sometimes drop out of party structures or vanish altogether. Sometimes, leadership can move such transitions along much faster. In the case of America’s fiscal conservatives, Trump’s transformation of the Republican Party into his personal vehicle excised the fiscal conservatives (along with the business conservatives and national security conservatives) from the Republican coalition altogether. It is entirely reasonable to expect the fiscal conservatives to eventually find a new home, but for now the brake that they have institutionally imposed upon government spending is simply not present.  Which makes the next few years a time for big-ticket ideas. There are plenty of them bouncing around in the American political space. Many are near-and-dear to the Left, who at their core see the government as a change-agent which has the right and duty to uproot and remake society. Yet these days the Right is hardly aghast at big spending either. After all, America’s biggest (pre-COVID) budget deficits happened under the Trump administration. Let’s take a look at the most likely culprits:

 Infrastructure spending:
 
This one is not only a perennial favorite, but its time has finally come. Typically, hang ups have included pork barrel politics, general ideological clashes over the nature and goals of this or that piece of infrastructure, state v federal decision-making authority and fund sourcing. But mostly it has been about cost. If you disagree with someone’s infrastructure plan on any non-cost point, you can always oppose it as being "wasteful”. That argument just vanished. And since everyone agrees in general that infrastructure spending is good (it’s just the other guys’ specific ideas that are kooky) expect a lot of it in the not-so-distant future.  Updating America’s interstate road, rail and water infrastructure would run a cool $3 trillion. A nationwide 5G effort would add another trillion. And that doesn’t even touch municipal infrastructure which could easily add another $2 trillion.
 
Universal basic income:
 
The concept of UBI is that government should provide every citizen with a monthly or weekly payment for "basic” expenses such as rent and food and power. As the argument goes, as automation erases more and more job categories, some sort of universal payout is the least disruptive and cheapest-to-administer method of wealth redistribution.   
Many criticize the very concept because it would denigrate the work ethic. Others like the fact that it would introduce a sharp class distinction between earners who pay taxes and a loafing class that simply subsists (many of these folk in this second camp assume – probably correctly – that over time UBI would introduce different tiers of political rights, with those who do not pay into the system losing full voting rights).
 
One of the biggest reasons no one has really tried UBI is that it is expensive to attempt, and no one knows if it’ll work because no one has ever really tried it at scale. Well, as part of the coronavirus stimulus and bailout packages, most citizens received a $1200 check and anyone on unemployment gets another $600 per week on top of their standard benefits (meaning many on unemployment are now making more than they did while working). More cash payments are all but certain for the next couple of months, and an extension of unemployment benefits are pretty much baked in as well.  Functionally, the United States is trying UBI out right now. A few months from now we’ll finally have a real-world, at-scale example of how UBI works. And if it works well, expect a massive push to implement it on a permanent basis.
 
Defense expansion:
 
I’ve always found the process of deciding defense spending fascinating. Even in the days after the Sept 11 attacks, it was ridiculous to think that Islamic terror posed a more existential threat to the United States than the Soviet nuclear arsenal. And yet US defense spending today – with the Global War on Terror largely wound down – is higher than it ever was during the Cold War. Defense specialists are bracing for what they see as the inevitable spending drawdown. I simply don’t think it is going to happen.  Today the annual budget of the Defense Department is just shy of $750 billion, plus another $52 billion for Homeland Security and $63 billion for the intelligence agencies. If there is going to be a budget reduction, it will come from American forces being fully brought home. Although, honestly, closing America’s overseas bases means future deployments likely will cost more because the military will need to launch from the homeland rather from a foreign footprint closer to the action.  A partial solution to that imbroglio? Don’t cut funding at all. In fact, invest in more long-range deployment capacity.
 
Universal health care:
 
America’s health care system is the world’s most expensive, but from the quality of the care provided (not to mention the system more or less falling on its face during COVID) you wouldn’t guess it. The smart conversation would be how to institute real health care reform (as opposed to Obamacare which simply introduced health care payment reform), but that unfortunately isn’t the conversation that’s starting.  Instead, the passion from politicians such as Bernie Sanders is for free health care for all, based on the Medicare model, which is by far the least efficient, lowest quality, most expensive option possible. Leaving aside both the financial estimates of the Sanders crowd and their detractors, most independent estimates put the cost for Medicare for All at least $2 trillion. Per year. Normally, such proposals would founder on the rocks of cost. Not anymore.
 
Green New Deal:
 
Contrary to much rhetoric (which I guess is the case with all these ideas), the GND is less a well thought out plan and more an ideological grab bag of Green/socialist concepts. That has been enough of a deal killer to turn most moderate Democrats against it, as well as those within the Green movement who think that math needs to be part of the discussion (which would include me). Bottom line? There really isn’t a real plan yet, but with Americans shifting into a price-as-myth mindset, I bet there will be one soon.  Any meaningful GND would need to require the near-complete overhaul of nearly every economic sector ranging from automotive to construction to power to agriculture to raw materials. We haven’t even invented many of the technologies that would be required, which, at present, makes any brass-tacks budget proposal impossible. But suffice to say if it could be done for $10 trillion, that would be really, really cheap.  It doesn’t take much imagination to foresee a potential political alignment in Congress to dump a few supertankers of twenties on this or that Green-friendly policy. At a minimum, I expect much increased subsidies for this or that greentech, even if (especially if) they haven’t yet proven to be market ready.
 
Industry bailouts:
 
While I expect much of the country to be returned to work by mid-July, there is much about the coronavirus we do not yet know. For example, if it turns out that everyone who gets it can be re-infected a few weeks down the road, then the fundamental structure of the American economy will have to adapt to a fundamentally new reality. Such changes in circumstance will not impact all sectors or firms equally, generating scads of winners and losers. Without financial assistance, some sectors will shrivel and firms within those sectors will simply die.  But with a bottomless supply of funding available? Not so much.  Some of these are pretty obvious. Just off the top of my head, tourism, aerospace, child-care, education and restaurants look particularly endangered. The question is where to draw the line.
 
Consider air travel. Of course, we’ll bail out the airlines. What about airports? What about aircraft manufacturers like Boeing, or aircraft maintenance firms? Do we bail out all their hundreds of component manufacturers as well? What if key components are manufactured in other countries? Are those firms rescued? Normally, the fear of not knowing when to stop establishes a natural firebreak on bailouts. But that fear is rooted in the fear of cost. That fear no longer applies.
 
State and municipal bailouts:
 
Most American states have balanced budget amendments, and most gain their income from sales and income taxes which have pretty much gone to crap during the coronavirus crisis. Add in that many have wildly out-of-control pension funding issues and many states faced financial catastrophe before COVID. With COVID its more like financial Armageddon.  So far Congress has only extended the states and cities very limited assistance, with Senate Majority Leader Mitch McConnel (R-Ky) dead-set against any sort of broad-based bailout program. It isn’t simply about ideology. Some states are actually doing ok (all things considered), so rewarding states who have failed to reform their systems does bring up issues of fairness and moral hazard.  But the fact remains that the single biggest reason not to do some sort of federal bailout – cost – just doesn’t mean as much as it used to. (It is also worth mentioning that the sort of financial power and flexibility which enables the federal government to spend as much as it wants does not extend to the states and municipalities. They are not sovereign powers with their own currencies.) Some sort of federal fund designed to provide at least bridge funding is probably inevitable.

 
All these possible programs have multiple policy, strategic and cultural implications.

If the federal government bails out a firm, does the government take shares? If the bailouts are big enough and last long enough does that mean the US government becomes the majority owner? We have a word for that: nationalization. Can you nationalize a city? A state?  

An America that doesn’t right-size its military for a new era, and expands its budget to make it very easy to reach out and slug someone, is a country that is perfectly willing to level any country anywhere for nearly any reason.

Massive infrastructure programs are not simply about building roads and bridges, they are designed to rewire economies for decades (my adopted home state of Colorado has a 100-year infrastructure plan). Decisions made now will guide the country’s development, literally for generations. There will be winners and losers.

An America on UBI is one that faces a wide array of utopian and dystopian futures. Consult Andrew Yang for the utopian, and the sci-fi series The Expanse for a good example of the other one.

There are those who would argue that none of these – let alone a few, much less all of these – would ever creak past the shrieks and performative rage of the Senate’s erstwhile fiscal hawks.  Ha! There are few things politicians of any political stripe care about more than getting reelected. And as the Trumplicans’ central rally cry – a booming national economy – crumbles, you can be sure that if not Senate Majority Leader Mitch McConnell, then President Trump’s survival instincts are going to go into overdrive.  Trump’s populist tendencies coupled with the very real economic pain being felt across broad swathes of the American electorate provides the current administration with an obvious path forward to electoral success: absolutely massive social spending.

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Question for our financially astute posters, (you know who you are, and you know who you aren't), before the Covid-19 situation, it was widely assumed that we were due for a correction.  Did this downturn due to the virus take care of that, or are we still due for more?

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1 hour ago, The_Omega said:

Question for our financially astute posters, (you know who you are, and you know who you aren't), before the Covid-19 situation, it was widely assumed that we were due for a correction.  Did this downturn due to the virus take care of that, or are we still due for more?

Honestly, there is no one who can give you a credible answer on this. We've never been in a situation where we basically have a government mandated recession/depression. The complete unknown is how will consumers behave when we "re-open," and how much damage has been done in the meantime to lower end workers (who were more likely to be laid off).

My personal opinion, which is only that, is that this is primarily a one off catalyst independent of the business cycle. The question is does this crisis cause a pullback in investment by companies and a reckoning for malinvestment fueled by cheap money and overly optimistic assumptions on growth (e.g., restaurant companies expanding too rapidly)? And how do you balance that against a Federal Reserve determined to flood the market with cheap financing -- companies like AMC, Carnival Cruise and Six Flags are getting bond deals done. 

The simple answer remains the same as the last decade plus -- don't fight the Fed. I think we go through this period, then return to a slow growth period so long as the Fed keeps the drugs flowing.

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15 hours ago, The_Omega said:

Question for our financially astute posters, (you know who you are, and you know who you aren't), before the Covid-19 situation, it was widely assumed that we were due for a correction.  Did this downturn due to the virus take care of that, or are we still due for more?

I’m not as economically astute as some but the economy has been a bubble for some time and it was going to pop sooner or later. Amazingly, they are still keeping the ballon inflated. I don’t think we hit bottom yet. 

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On 5/12/2020 at 7:54 PM, Mlodj said:

 

We really should take this opportunity to restructure our national debt. It’s a golden opportunity to expand our average maturity and lock in low rates.

On a related note, Powell has been very vocal that we will not go to NIRP. Setting aside the argument for/against NIRP, if we do find ourselves in that place, we should absolutely take advantage of it. If we can roll over huge swaths of our debt at negative rates and effectively lower our national debt stock while financing COVID disaster relief, that would be quite a nice benefit.

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14 hours ago, TEW said:

We really should take this opportunity to restructure our national debt. It’s a golden opportunity to expand our average maturity and lock in low rates.

On a related note, Powell has been very vocal that we will not go to NIRP. Setting aside the argument for/against NIRP, if we do find ourselves in that place, we should absolutely take advantage of it. If we can roll over huge swaths of our debt at negative rates and effectively lower our national debt stock while financing COVID disaster relief, that would be quite a nice benefit.

The problem is the demand for longer duration bonds isn't robust enough to deal with that kind of supply. 30 year Treasuries are generally sought out by insurance and pension guys looking to match duration, but there has been a move to shorter time horizons across the board. The US keeps a flatter curve by jacking up the supply of short duration paper, leaving less supply in the longer dated stuff for the guys who need it. However, those guys (i) have gotten more comfortable with shorter duration paper and (ii) don't have the overall demand of banks, dealers and sovereign wealth funds on the shorter dated stuff. This is exacerbated by the move into alternative asset classes by pension managers as well -- you can't buy the 30 year at 1.3% when you have an 8% target return rate.

Basically, the demand isn't there to sell mass amounts of the 30 year at the yield on the screen. 

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1 hour ago, vikas83 said:

The problem is the demand for longer duration bonds isn't robust enough to deal with that kind of supply. 30 year Treasuries are generally sought out by insurance and pension guys looking to match duration, but there has been a move to shorter time horizons across the board. The US keeps a flatter curve by jacking up the supply of short duration paper, leaving less supply in the longer dated stuff for the guys who need it. However, those guys (i) have gotten more comfortable with shorter duration paper and (ii) don't have the overall demand of banks, dealers and sovereign wealth funds on the shorter dated stuff. This is exacerbated by the move into alternative asset classes by pension managers as well -- you can't buy the 30 year at 1.3% when you have an 8% target return rate.

Basically, the demand isn't there to sell mass amounts of the 30 year at the yield on the screen. 

What about the TYT?

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