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Oil bulls’ hope for quick price dip dimmed by 2020 crude under $70

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© Reuters. Gasoline drips off a nozzle during refueling at a gas station in Altadena

By Jonathan Leff

HOUSTON (Reuters) – As oil prices entered a second steep slide a few weeks ago, bullish traders and analysts had hoped for a repeat of the sharp but short dip that occurred early in the year – a speculative slide below $50 a barrel followed by a quick recovery.

Some are now reconsidering that view, as long-term oil prices take the lead in the market’s latest dive, swaying sentiment toward a lengthier slump that would mean prolonged pain for big producers, from Exxon Mobil Corp (NYSE:) to Saudi Arabia.

While immediate delivery benchmark global futures at $50 a barrel are still about $4 higher than they were at their lowest point in January, prices for delivery in December 2020 are nearly $8 lower than the start of this year, trading at a contract low of less than $67 on Tuesday. A year ago the contract hovered at around $100 a barrel.

The reason for the deterioration of the forward curve and decline in “long-dated” futures is a subject of debate.

But even some who disagree with the fundamental logic of lower long-dated prices are coming round to the scenario that prices will be lower for longer.

“The back of the market has led prices lower as speculators are no longer convinced higher oil prices are required to balance future oil supply and demand,” consultants PIRA Energy Group, which called last year’s price slide but has also predicted a sharp rebound, wrote in a note this week.

The firm does not make its specific forecasts public.

“PIRA disagrees with this view, but a ‘show me’ mindset regarding tightening balances will keep prices lower than forecast earlier.”

Some believe the recent selloff was fueled by speculators fleeing the market amid collapsing confidence after China’s stock market crash, and exacerbated by a lack of liquidity and resumption of hedging by producers including Mexico, which sell futures to guard against lower prices.

“The decline in calendar year 2016 prices has been

overstated, in our view,” analysts at Barclays (LONDON:) wrote this week. “Fundamental tightening, demand and stock revisions, and current

positioning are likely to raise prices in the months ahead.”

Others say it stems from more deeply rooted fundamental factors, such as falling production costs in the U.S. shale patch and expectations of rising exports from Iran next year following a landmark nuclear agreement – and if so, far forward prices may be flashing warning lights for the future.

A NEW EQUILIBRIUM?

The retreat in long-term oil prices commenced in the latter part of last year, when Saudi Arabia made clear it would no longer cut production in order to tighten up sloppy markets.

Absent the kingdom’s implicit promise to defend prices, the value of Brent crude oil for five years in the future slid from nearly $90 a barrel in late November to around $72 almost two months later.

Over the past month, however, it has dived anew, reaching nearly $66 a barrel on Tuesday, its lowest since 2009.

Last week, analysts at ABN AMRO cut its 2016 oil price forecasts by $10 a barrel on a mix of factors including falling production costs, disappointing demand, a stronger U.S. dollar and deteriorating market sentiment.

“What we see is that the U-shape recovery which we still expect for oil prices will take longer to materialize,” Senior Energy Economist Hans van Cleef told the Reuters Global Oil Forum last week.

The question for oil executives, traders and analysts is whether this represents a new equilibrium for the market – a price high enough to encourage just enough new production in the future to meet demand, which continues to grow.

Standard Chartered’s Paul Horsnell, one of the most bullish forecasters in Reuters monthly poll with a projection for $93 Brent in 2017, says no – long-dated prices are too low, although the latest slide may signal a deferred recovery.

“Is this a market transitioning from a view of an inevitable bounce in 2016 to adding another year onto the rebound? We just don’t know yet,” said Horsnell.

And while some big companies such as BP (LONDON:) Plc and Royal Dutch Shell (LONDON:) Plc are preparing investors for a more extended downturn, some are still signaling cautious optimism.

U.S.-focused Anadarko Petroleum Corp (NYSE:), for instance, is opting not to pursue an “aggressive” approach to completing shale wells that have been drilled but not yet hydraulically fractured.

Completing wells more quickly is “an option we might choose to pursue if we thought the current environment was going to be protracted and we were somehow in a new normal, $50-esque oil environment,” Chief Financial Officer Bob Gwin told analysts last week.

“We don’t believe that’s true over the intermediate to longer term.”

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Biden’s ‘Made In America’ Initiative Crippled By His Own Economic Plan

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Biden’s ‘Made In America’ Initiative Crippled By His Own Economic Plan

Democratic nominee Joe Biden released his “Made in America” plan last week. However, at least one critic says none other than Joe Biden himself will fail the plan.

Brian Brenberg, a professor of business and economics at The King’s College in Manhattan, says Biden’s “Made in America” plan is a list of “vague promises” that directly conflict with his own economic plan.

“It amounts to a laundry list of vague promises to create jobs, increase federal spending by hundreds of billions of dollars, and raise taxes on U.S. companies with overseas operations. But the biggest threat to Biden’s “Made in America” goals is his own economic plan,” says Brenberg.

He says if Biden really did want to strengthen businesses and bring back workers, he would make America the greatest country in the world to start a business. But his actions say differently.

“If he were really serious about strengthening businesses and workers here at home, his first step would be to make America the best place on earth to build businesses. That means cutting — not increasing — taxes and regulations he’s already put on the table.”

Flaw’s in Biden’s “Made in America” Plan

Biden’s errors are limited to just his “Made in America” plan, says Brenberg. They also spill over into his “Green New Deal,” however. It was jammed full of “massive new growth-killing taxes, spending, and regulations,” they said. This was all done by the Bernie Sanders-socialism side of the aisle.

The Made in America plan calls for higher taxes on corporations, income, investments, inheritance and social security. Brenberg says the majority of these tax increases are supposed to impact only wealthy individuals. Those are the people who make more than $400,000 per year in income.

The problem though, is that Biden’s new taxes won’t raise enough from the wealthy to cover all the new spending he’s proposing. According to Brenberg, Biden’s tax hikes will raise between $3-4 trillion. This is far too little to cover his $11 trillion in new spending.

“Middle class Americans shouldn’t be surprised when they get pressed into paying for the shortfall,” says Brenberg.

Doing the Opposite of the Intention

He adds that taken as a whole, Biden’s plan disincentives anyone from starting new businesses in the US.

“When you add it all up, making things in Joe Biden’s America is going to be more costly, more complicated, and far less attractive to many companies and would-be entrepreneurs.”

Biden’s camp knows this, which is why Brenberg says the plan specifically penalizes companies for trying to leave the US and move their headquarters or operations to countries with lower taxes.

Tax-inversions, many know them as, spiked during the Obama years when companies fled high taxes here for more favorable locations. That all stopped, says Brenberg, with the Trump tax cuts in 2017. But a Biden victory in November will cause many companies to once again look to move out of the country. Penalizing them is the wrong approach.

“Threatening even more new taxes and rules to keep that from happening is not the answer.”

Encouraging “Made in America”

There is only one way to encourage “Made in America,” according to Brenberg. That is to make it the best place on earth to start and run a business. However, Biden’s plan will do the opposite.

“’Made in America’ works when America is the best place on the planet to start, grow, and invest in a business. That means keeping taxes low, ensuring regulations aren’t burdensome and avoiding utopian schemes to reinvent the economy based on radical ideology.”

“Right now, Joe Biden’s economic plans are failing on all three of those counts,” he says. Brenberg also adds that “no amount of government giveaways, government threats, or ‘Made in America’ branding will make up for it.”

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Ron Paul: This Is The Biggest Financial Bubble In History

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Ron Paul: This Is The Biggest Financial Bubble In History

Dr. Ron Paul believes that we are in the biggest financial bubble in history. He also said that when it pops, it will be very violent.

In a recent interview with Kitco News, Paul covered a wide range of topics. Some of these topics include the Federal Reserve, interest rates, and the economy.

He was asked about the Federal Reserve’s dual mandate of full employment and inflation control. To this, Paul said the Fed shouldn’t even be in the business of worrying about either.

“They shouldn’t even be in the business of pretending that if they want a good, healthy economy, and they want as best the employment possible, and the most balanced pricing system, you have to get rid of the system. You can’t have this artificial system from the Federal Reserve,” he said.

Free Market Should Set Interest Rates

Paul said the free market should be the one setting interest rates. Additionally, when the Fed thinks it has control over things is when problems start.

“You have to have a market rate of interest, and you have to have a money supply that’s determined by the market rather than by the politicians, because we are seeing the results of many, many years of this, especially since 1971 with what is happening now, it’s the runaway spending, we can’t have the runaway spending, if we continue to do this, and the fact that they pretend that they can control things, every time they think they have control then there’s a major correction, which we are in the midst of.”

He said the big event was when the Fed realized last fall that the bubble was starting to pop. He also mentioned that it began doing everything it could to keep it going. This meant cutting rates to zero.

“The big event that turned this whole thing on was in the fall when it was realized that the financial bubble was collapsing and they have destroyed for many, many years the most important function of the market, in the money supply are the interest rates. So we destroyed the pricing structure and that’s why we have so many mistakes, malinvestment, too much debt, too much government, and it wouldn’t happen if you didn’t have a Federal Reserve system that thinks they can manage the economy through monetary manipulation.”

Gold and the Market

Paul said the Fed can print as much money as it wants, but ultimately gold is what underpins the markets.

“I remember when gold was legalized in the 70’s, everybody thought the gold price would soar up, but it had already gone up, but at the time, our Treasury Department and the IMF (International Monetary Fund) dumped a lot of gold just to try and punish the people who knew that gold was a haven. So there’s a lot of monetary and gold manipulations, but ultimately the markets are determined by metals, not by paper money.”

He said we are getting close to a “cataclysmic” end to the bubble. The unfortunate result is that a lot of people will be wiped out financially.

“We are coming desperately close to a cataclysmic end to the current monetary system. I happen to believe it’s the biggest financial bubble in the history of monetary policy for the whole world. And the correction is going to be very violent, and it’s already pretty bad. People are going to get a lot poorer.”

“The bills have to be paid, the economy is going to turn down, and a lot of people have already gotten a lot poorer, but it’s going to get a lot worse unless we wake up and return to some sound economic and monetary policies.”

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Despite Setting All-Time High, S&P 500 Vulnerable Due To Uneven Recovery

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Despite Setting All-Time High, S&P 500 Vulnerable Due To Uneven Recovery

Despite the S&P 500 closing at a record high last week, the recovery hasn’t been a rising tide that lifts all boats.

Analysis by CNBC shows that the vast majority of stocks have yet to regain their prior highs. In fact, since the previous high on February 19 and the new high on August 18, only 38% of stocks in the S&P 500 are in positive territory over that time frame. An alarming 62% of stocks are still in negative territory since February 19.

Michael Yoshikami, CEO of Destination Wealth Management, appeared on CNBC last week. The described a “shift in demand” during his appearance. He says it’s the reason why some stocks have fully recovered while others are still reeling.

“It’s not as if everything is rising,” he said. “You pull money out of names that really aren’t attractive given current conditions. And that money moves over to companies that are thriving in this environment.”

Recoveries in Different Industries

The recovery has also varied significantly depending on the industry. In consumer staples, health care, and information technology industries, more than half of the stocks have climbed into positive territory. This happened between Feb. 19 and Aug. 18. Contrast that with stocks in the energy and utility sector where less than 10% of stocks are in positive territory since February 19.

Among the stocks hit hardest since the February peak are Norwegian Cruise Lines (-71%), Occidental Petroleum (-67%), and Carnival Corporation (-67%).

Amazingly, despite the eye-popping rally since the March low, there are six stocks that are still in negative territory from March 23 through August 18: Coty Inc., FirstEnergy, Walgreens, Gilead Sciences, Wells Fargo, and Intel.

Just five stocks, Amazon, Alphabet (Google’s parent company), Apple, Microsoft and Facebook account for 20% of the index by weighting, the biggest weighting for the top five stocks in the index since 1980.

Those 5 stocks alone have accounted for 25% of the overall index return since the March lows.

“Divergence Between Winners and Losers”

Brad Neuman, director of market strategy for Alger, a New York fund manager, says this shows a “record divergence between winners and losers.”

“The mega-cap growth and tech companies have done incredibly well in the pandemic,” said Meghan Shue, head of investment strategy for Wilmington Trust. “We think it is probably a bit too far too fast — there is a great deal of optimism priced into the market right now.”

The uneven recovery puts the market in danger. This is according to a man The Wall Street Journal calls “the hedge-fund king you’ve never heard of.”

Jeffrey Talpins, the founder of Element Capital, warned clients in a letter last week about repositioning his hedge fund. He plans on repositioning his $16 billion hedge fund for a potential downturn after an unprecedented rally.

“We believe that the rally has now extended well beyond levels justified by the state of the economy, and with little regard for the myriad of risk factors looming on the horizon.”

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