“I have noticed that when chickens quit quarreling over their food they often find that there is enough for all of them. I wonder if it might not be the same with the human race.” - Don Marquis
This week, two sectors are covered in particular: the oil sector and China’s looming crisis. In both cases, overproduction, lower demand and heavily indebted balance sheets are weighting on future prospects. While it is impossible to accurately predict the timing or the consequences of these crisis, it is reasonable to expect widespread damages.
Indeed, a number of companies and countries are heavily dependent on the oil sector and/or China, especially banks and commodity exporting countries. The ‘domino’ effects are particularly worrying, with potential debt contagion spreading to the Western world. Not a very rosy scenario, but it appears to be in line with the fact that the world economic growth is running out of steam quite rapidly, now that all main bubbles are deflating and high levels of debt are overloading the system.
Complex constructions such as the European Union are at a particular risk given their weak political structure, but autocratic countries such as Russia or China are yet to show their ability to weather the coming crisis. Governing is an easier task when the world is in good economic shape.
It is thus important for the Western citizens not to be mesmerized by the performances of autocratic regimes, and equally important for Western politicians to better address domestic issues. Indeed, the rise of demagogues reflect a well founded economic and political malaise felt throughout their countries, which drive parts of the population toward the advocates of more direct remedies. But most solutions are targeting the shadows rather than the roots of the problems, which may result in increased damages.
Decades of mediocre politics have discredited the political system while the rise of information technologies have offered citizens the ability to find any information they want. This results in increased individualism and the breaking down of society and social fights into specific, unrelated and sometimes confrontational parts. The ‘new’ world of low growth is thus a potential harbinger of future political chaos.
Science, General Knowledge & Environment
Scarcity: Why Having Too Little Means So Much – (Hat tip Juju) – “When an individual – any individual – is primed to think about his money troubles, his ability to perform tests and tasks is measurably reduced. Reminded that they are poor, individuals “showed less flexible intelligence, less executive control. With scarcity on his mind, he simply had less mind for everything else.”“
Thinking and speaking – (Hat tip Lao Ho) – “Most of us have been admonished from an early age to “think before you speak.” But it turns out that speaking doesn’t work that way. Studies in psycholinguistics suggest that humans routinely dive into spoken sentences without a plan for how they will end.“
Evolution of global temperature over the past two million years – “This result suggests that stabilization at today’s greenhouse gas levels may already commit Earth to an eventual total warming of 5 degrees Celsius (range 3 to 7 degrees Celsius, 95 per cent credible interval) over the next few millennia as ice sheets, vegetation and atmospheric dust continue to respond to global warming.“
How Small Forests Can Help Save the Planet – “More than half of the 751 million acres of forestland in the United States are privately owned, most by people like Ms. Lonnquist, with holdings of 1,000 acres or less. These family forests, environmental groups argue, represent a large, untapped resource for combating the effects of climate change.“
How Actual Nuts and Bolts Are Bringing Down Oil Prices – “That’s because oil majors’ urgent mission to slash costs includes standardizing the components used in drilling for oil–a development that has helped turn unprofitable wells into moneymakers, protected bottom lines, and allowed companies to keep pumping even in the face of crude prices that have more than halved over the past three years.”
Smoke And Mirrors: What Did OPEC Really Agree On? – “Given the fact that Iran, Nigeria and Libya are already exempt from any cuts, and Iraq is angling for a higher allotment ahead November’s meeting, the efficacy of any deal will have to come down to what Saudi Arabia alone is willing to cut.“
US shale oil recovery underway – “If you combine the Deutsche forecast US turnaround with a rebounding Libya and Nigeria you get nearly 2mmb/d more oil versus a 0.2-0.7mmbb/d OPEC cut for 2017.“
Oil And Gas Bankruptcies Set To Double This Year – “Creditors from bankrupt oil and gas companies are suffering in the current climate, as loan recovery rates have plummeted while insolvencies have increased, which may even be on a par with the collapse of the telecoms industry in the early 2000s.“
China Balancing Coal Capacity-Cut Goal Against Soaring Prices – “The government earlier this year pursued policies aimed at eliminating outdated and inefficient coal producers while helping support larger, modern miners that were struggling with prices that tumbled to the lowest in almost a decade. The ensuing output decline pushed up prices so quickly that regulators scrambled to fine tune their plans.“
History & Geopolitics
The great leap upward: China’s Pearl River Delta, then and now – “The Pearl River Delta has witnessed the most rapid urban expansion in human history – a predominantly agricultural region transformed into the world’s largest continuous city. By revisiting the sites of rare archive images of Hong Kong, Shenzhen, Guangzhou and Macau from the 1940s through 1990s, our photographers have documented this staggering change“
Finance & Economics
More Wealth, More Jobs, but Not for Everyone: What Fuels the Backlash on Trade – “Trade deals, immigrant labor, automation: As Mr. Arkenbout sees it, these are all just instruments wielded in pursuit of the same goal — paying him less so corporations can keep more.“
Sheila Bair Called the Financial Crisis. Here’s Her New Nightmare – “Some 43 million Americans, she learned, collectively carry nearly $1.4 trillion in student debt, making it the second-largest source of household debt after home mortgages, according to the Federal Reserve. The federal government owns or backs more than 90 percent of it. More than 42 percent of federally owned student loans aren’t being repaid as expected or on time.“
China’s richest man: Property bubble “biggest ever” – “The big problem, according to Wang, is that prices keep rising in major Chinese metropolises like Shanghai but are falling in thousands of smaller cities where huge numbers of properties lie empty. “I don’t see a good solution to this problem,” he said. “The government has come up with all sorts of measures — limiting purchase or credit — but none have worked.”“
Why a Banking Crisis in China Seems Unavoidable – “First, debt service ratios (the ratio of interest payments plus amortisations to income) are 20% higher than the ratio in the US at the onset of the 2007/8 subprime crisis. Second, house prices have been rising very strongly, fuelled by a frenzy of borrowing, and this increases the exposure of the economy to a sudden drop in real estate prices. Third, a big chunk of credit goes to the old economy, where profitability and cash flows are slowing.“
Picture of the day: Globe photos of the month, September 2016
About Carlito Riego
"Great perfection may appear imperfect, but its usefulness is inexhaustible. Great abundance may appear empty, but its usefulness cannot be exhausted. Great correctness may appear twisted, great skills appear crude, great eloquence appear awkward. Activity conquers cold; inactivity conquers heat. Clear serenity governs the world." - Lao Zi