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Total Could Miss Out On 14 Billion Barrel Brazilian Reserves

August 29, 2017 Tsvetana Paraskova 0

Total’s study on the environmental impact of drilling in one of the Amazon’s basins hit a roadblock on Tuesday when Brazilian regulator Ibama said it rejects the validity of the efforts. The subject of the study is an area that could contain up to 14 billion barrels worth of oil reserves. Total has spent four years trying to validate the estimates to determine the commercial viability of a venture in the area, but the discovery of a sensitive coral reef near the blocks that would be up for tender has put the environmental approval process…

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The Last Time This Few Americans Thought Stocks Would Drop, They Crashed

August 29, 2017 Tyler Durden 0

According to the latest Conference Board survey, 80% of Americans surveyed believe that stock prices will not be lower in the next 12 months. The last time the nation was so convinced of the market’s ‘permanently high plateau’ was in the fall of 2007, as the S&P topped…

Only 20% of Americans believe stocks will fall in the next 12 months – that is the lowest number since mid-2017

What happened next was not pretty (oh and in 1999/2000…)

And don’t forget that speculators have never been more net long Dow futures

 

Still it’s probably nothing. If biblical floods and threats of nuclear armageddon can’t take stocks down, what will?

 

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UAE criticises “colonial” role of Iran, Turkey in Syria

August 29, 2017 Middle East Monitor 0

The United Arab Emirates urged Iran and Turkey on Monday to end what it called their “colonial” actions in Syria, signalling unease about diminishing Gulf Arab influence in the war. Allied to regional powerhouse Saudi Arabia, the UAE opposes Syrian President Bashar al-Assad and his backer Iran and is wary of Turkey, a friend of Islamist forces the UAE opposes throughout the Arab world. UAE Foreign Minister Sheikh Abdullah bin Zayed Al Nahyan urged “the exit of those parties trying to reduce the sovereignty of the Syrian state, and I speak here frankly and clearly about Iran and Turkey.” He was speaking at a news conference with Russian counterpart Sergei Lavrov, whose country helps Assad militarily. “If Iran and Turkey continue the same historical, colonial and […]

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Economists Are The New Astrologers

August 29, 2017 Tyler Durden 0

Authored by Andrew Syrios via The Mises Institute,

When Christopher Nolan was promoting his previous film Interstellar, he made the casual observation that “Take a field like economics for example. [Unlike physics] you have real material things and it can’t predict anything. It’s always wrong.” There is a lot more truth in that statement than most academic economists would like to admit.

Alan Jay Levinovitz recently put forth the provocative argument that economics is “The New Astrology.” He notes that “surveys indicate that economists see their discipline as ‘the most scientific of the social sciences.’” But unfortunately “real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.”

Indeed, Levinovitz goes on to observe that,

The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics … has succeeded: its central problem of depression prevention has been solved’.

 

Short-term predictions fair little better — in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot.

There are, of course, many other examples of the failure of mathematical models in economics. The model Christina Romer put together during the height of the Great Recession concluded that unemployment could go as high as 8.8 percent without the economic stimulus bill. With the stimulus, unemployment went over 10 percent. The spectacular failure of Long Term Capital Management, which was built solely upon investing on mathematical models, is another great example. Indeed, Daniel Kahneman found the “correlations was .01” when asked to evaluate the investment outcomes of 28 different advisors. Warren Buffet is currently crushing the hedge fund Protégé Partners in their ten year, one million dollar bet. (Buffett picked an index fund that invests in the S&P 500.) Finance and economics are linked at the hip in this overconfident, mathematical malaise it would seem.

Returning to Levinovitz, the problem as he sees it is that these highly complicated models built with mystifying and ingenious mathematical equations are completely useless if they are erected upon false assumptions. You may have built the most luxurious mansion imaginable, but if you built it on a hill of sand it might as well be a house of cards.

Think of the Ptolemaic model of the universe that put the Earth at the very center. The Ancient Greeks would notice that the stars would move across the sky, then stop, then go backward, then start moving forward again. To resolve this conundrum, Claudius Ptolemaeus put together an ingenious model of “circles within circles.” Each star not only orbited around the Earth along a given trajectory, but also maintained a secondary orbit around a point moving along the first orbit to make it appear from the Earth that the star would sometimes move backward.

The geocentric model of the universe was a stupendous mathematical achievement, but alas, it was all for naught given the assumptions it was built on were completely false.

Levinovitz uses the example of astrology, noting that,

As an extreme example, take the extraordinary success of Evangeline Adams, a turn-of-the-20th-century astrologer whose clients included the president of Prudential Insurance, two presidents of the New York Stock Exchange, the steel magnate Charles M Schwab, and the banker J P Morgan. To understand why titans of finance would consult Adams about the market, it is essential to recall that astrology used to be a technical discipline, requiring reams of astronomical data and mastery of specialised mathematical formulas. “An astrologer” is, in fact, the Oxford English Dictionary’s second definition of “mathematician.” For centuries, mapping stars was the job of mathematicians, a job motivated and funded by the widespread belief that star-maps were good guides to earthly affairs. The best astrology required the best astronomy, and the best astronomy was done by mathematicians — exactly the kind of person whose authority might appeal to bankers and financiers.

When Adams was eventually arrested in 1914 for laws that forbade astrology, “it was her mathematics that eventually exonerated her.” And this is by no means just a Western phenomenon. Another example the author references is the similarly mathematically impressive work done regarding Li in Ancient China. Li was also a mathematical model of the stars and for whatever reason, thought to be “essential to good governance.”

Obviously it wasn’t, but the Chinese spent “astronomical sums refining mathematical models of the stars.” As we do with much that passes for economics today.

Interestingly enough, Levinovitz quotes several famous Keynesian and neo-classical economists, including Paul Romer, who criticized the “Mathiness in the Theory of Economic Growth” and the man who’s always right (except when he isn’t) Paul Krugman. In this instance, though, Krugman is mostly correct observing that “As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.”

But this reliance on math to hide the underlying flaws in an economic theory sounds like it falls perfectly in line with “The Pretense of Knowledge” that Friedrich Hayek warned about all those years ago.

Since then, many economists believed they had made economics into a scientific discipline based on modeling and empirical testing. They assured us that by using copious amounts of data and fine-tuned mathematical models they could centrally plan an economy, eliminate the business cycle and increase economic growth and prosperity. And they were wrong.

Surprisingly, Levinovitz does not use the word “econometrics” because that’s the first thing that came to my mind while reading his essay. The econometric approach may be the best example of the mathematical arrogance Levinovitz describes. The flaws in its internal reasoning become obvious, however, as you peel away the math, as Robert Murphy shows,

The econometric approach to stock price movements is analogous to a meteorologist who looks for correlations between various measurements of atmospheric conditions. For example, he might find that the temperature on any given day is a very good predictor of the temperature on the following day. But no meteorologist would believe that the reading on the thermometer one day somehow caused the reading the next day; he knows that the correlation is due to the fact that the true causal factors — such as the angle of the earth relative to its orbital plane around the sun — do not change much from one day to the next.

 

Unfortunately, this distinction between causation and correlation is not stressed in econometrics. Indeed, for economists truly committed to the positive method, there can be no such distinction. Although the econometric pioneers may understand why certain assumptions are made and can offer a priori justifications such as “rational expectations” for the details of a particular model, the students of such pioneers are often caught up in the mathematical technicalities and lose sight of the true causes of economic phenomena.

But more fundamentally, as Austrian economist Frank Shostak notes, “In the natural sciences, a laboratory experiment can isolate various elements and their movements. There is no equivalent in the discipline of economics. The employment of econometrics and econometric model-building is an attempt to produce a laboratory where controlled experiments can be conducted.”

The result is that economic forecasts are usually just wrong.

Levinovitz believes there is a conflict of interest at the heart of academic economics. He approvingly quotes one economist saying “The interest of the profession is in pursuing its analysis in a language that’s inaccessible to laypeople and even some economists. What we’ve done is monopolise this kind of expertise.” And furthermore, “…that gives us power.”

But it’s more than even just that. It’s not just that economists fails to make accurate predictions or that hedge funds fail to beat the market. If economics is unable to provide bureaucrats with the ability to effectively guide and control an economy, the best alternative would be to turn it back over the market. It’s not just that “mathiness” gives economists “power.” In many ways, it’s the façade that justifies a large number of them having jobs in the first place.

It appears that Levinovitz hasn’t quite grasped the full consequences of the argument he has espoused; namely that because economics models are mostly useless and cannot predict the future with any sort of certainty, then centrally directing an economy would be effectively like flying blind. The failure of economic models to pan out is simply more proof of the pretense of knowledge. And it’s not more knowledge that we need, it’s more humility. The humility to know that “wise” bureaucrats are not the best at directing a market — market participants themselves are.

 

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“As If It Never Happened” – Stocks, Bonds, Dollar & Gold Erase Almost All Sign Of Korea’s Missile Madness

August 29, 2017 Tyler Durden 0

Don’t worry America – biblical floods and a world on the verge of global thermonuclear war are no reason to be fearful…

As soon as the US equity market opened, the panic protection team went into action. Gold and Bonds have erased all their gains as the dollar and stock recover all their overnight losses…

 

Amid a massive burst of helpful buying mid-morning in the S&P futures…

pic.twitter.com/r04CekyLxm

— pippocamminadritto (@guado77) August 29, 2017

And as Nanex’s Eric Scott Hunsader notes, “this never happens”…

Yes — that NEVER HAPPENS (where a spike after open comes close to the activity level set by the open) https://t.co/5PhSEZTz6G

— Eric Scott Hunsader (@nanexllc) August 29, 2017

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Oil Prices Set To Rise as Supply-Demand Gap Closes Up

August 29, 2017 Zainab Calcuttawala 0

Oil prices are poised to climb over the coming weeks as supply and demand approach parity, according to analysts who spoke to CNBC as the remnants of Hurricane Harvey continues to ravage Houston, the energy capital of the United States. A rise in oil demand for 2017 made large strides in closing the gap between available crude and the number of willing buyers, sources said. “[Oil prices] should be going up because inventories have been drawing at a phenomenal pace over the past few weeks and months,” Amrita Sen of Energy Aspects said. Both West…

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Insurance Companies Could Face Staggering $500 Billion Loss During A Crisis-Like Downturn

August 29, 2017 Tyler Durden 0

Here’s one more example of how central banks’ global coordinated monetary stimulus in the wake of the financial crisis has increased systemic risk in the US: According to an analysis conducted by BlackRock, insurers are more vulnerable to a market downturn now than they were ten years ago.

The reason? Ultralow interest rates have forced insurers to venture into markets with higher yielding assets, forcing them to stomach more risk along the way. Whereas insurers once tended to adhere to only the safest types of fixed-income products – typically highly rated government and corporate debt – they’re increasingly buying exposure to risky high yield and EM products, along with illiquid private equity funds, to try and boost their earnings back to pre-crisis levels.

These products carry a potentially higher reward for insurers, but heightened risks are also omnipresent. In a downturn similar to the 2008 crisis, BlackRock estimates that US insurers’ holdings would drop by 11% – even more than they did during the crisis. Such a drop would be tantamount to $500 billion in losses.

“The world’s largest money manager mined regulatory filings of more than 500 insurance companies and modeled their portfolios in a similar downturn. Their stockpiles – underpinning obligations to policyholders across the nation – would drop by 11 percent on average, according to its calculations. That’s significantly steeper, BlackRock estimates, than the group’s “mark-to-market” losses during the depths of the crisis.

 

The reason is simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets – a bucket that can include hard-to-sell stakes in private equity investments, hedge funds and real estate.”

Even as interest rates rise, Zach Buchwald, head of BlackRock’s financial-institutions group for North America, said that the insurers’ appetite for riskier assets will remain because “many of the allocations are hard to reverse.”

‘There is more risk being put into these portfolios every year,’ Zach Buchwald, the head of BlackRock’s financial-institutions group for North America, said in an interview. And such shifts may become permanent, especially because many of the allocations are hard to reverse, he said.”

Which is a problem because, even though insurers claim they’re offsetting risk by “diversifying” into different types of risky assets, big losses can accrue if all of these assets were to drop at the same time – as one might expect during a “risk off” flight to quality.

“The new diversity should provide a huge benefit, according to Buchwald. After all, it was concentrations of investments in mortgage-backed securities and certain equities that proved the biggest pitfalls during the crisis, a study by the Organization for Economic Co-operation and Development found.

 

But even piles of investments that appear diverse can suffer big losses if care isn’t taken to ensure the assets won’t drop at the same time.”

The BlackRock study was an attempt to market its new “Aladdin” analytics software.

“BlackRock examined the insurers’ holdings as it pitches a service called Aladdin. It’s trying to sell the companies analytics and advice, helping them test how complex portfolios may perform under various conditions, so they can design them to withstand catastrophe.”

According to Bloomberg, the study has been published at an “interesting time” for markets.

“The assessment comes at an interesting time. With U.S. stocks trading near record highs and the Federal Reserve starting to unwind years of extreme measures, there’s a raging debate on Wall Street over whether a big correction is looming – and if so, whether unforeseen faults in financial markets might crack open, as they did a decade ago.”

Mohamed El-Erian, chief economic adviser at German insurance conglomerate Allianz, warned that “non-banks” are increasingly reaching for high-yield bonds without regarding the risks.

“The strong ‘quest for yield’ remains visible in non-banks,” Allianz SE Chief Economic Adviser Mohamed El-Erian said in a Bloomberg View column this month. The group, which typically includes insurers, has pushed into asset classes “including what most deem to be a stretched market for high-yield bonds.”

Some insurers, like Athene Holding, have bragged about the outsized returns from their riskiest investments.

“Athene Holding Ltd., an insurer that leans on Apollo Global Management to oversee investments, is wagering on complex, hard-to-sell debt. Its alternatives portfolio, representing about 5 percent of total holdings, posted a 12.3 percent return on an annualized basis in the second quarter.

 

It’s among a handful of insurers backed by private equity firms betting they can earn better returns than peers focusing on traditional investments. But even MetLife Inc. and Prudential Financial Inc., two of the oldest and largest life insurers in the U.S., have said they’re pushing into commercial property bets and private market debt in search for yield.”

When insurers invest in illiquid products like a private equity fund, they need to hold more capital on their books to offset the risk – money, that, as Bloomberg points out, “isn’t free.” After adjusting for the reverse capital, BlackRock found that the high-flying PE returns weren’t as spectacular as some insurers believed.

“BlackRock’s study showed that the industry’s forays into alternative investments haven’t always delivered yields on par with what the underlying money managers project. Insurers have to hold large amounts of capital against the investments they make — money that isn’t free. When adjusting for those charges, private equity returns are generally less than 4 percent, whereas they would have been above 6 percent.

 

That, according to BlackRock, indicates insurers would probably earn more on investments in mezzanine real estate debt and high-risk equity investments in global real estate and other real-asset financing.”

Since the crisis, insurers have increased PE investments by 50%, despite the lower risk-adjusted returns highlighted by BlackRock. Maybe some of them SHOULD consider buying the asset-manager’s new software…

“After experimentation with different assets, some insurers have shifted wagers. By the end of last year, the industry’s funds held in private equity had soared 56 percent to $56 billion from 2008. That trend is leveling off, Buchwald said.

 

Real estate investments, meanwhile, hit a seven-year high in 2015, then dropped by $7 billion the next year to $42 billion. Hedge fund holdings spiked to $24 billion in 2015, only to drop to $18 billion the next year. MetLife and American International Group Inc. were among those that began changing strategies.

 

The key is to find “other, more predictable income generators,” Buchwald said, ‘things like infrastructure and real estate.’”

Whatever their risk tolerance, a growing number of market strategists believe that the next sharp downturn in markets could begin as soon as this year. This would mark the first real test of insurers’ capital cushions since the crisis. And, particularly if it triggers a wave of defaults in the high-yield sector (or even among European sovereigns), a market rout could wipe out trillions of dollars worth of insurance company holdings.

Let’s hope that – for their sake – when the other shoe drops, insurers are ready. With Republicans controlling the White House and both chambers of Congress, failing insurers likely won’t receive the same type of bailout that AIG did during the crisis.  

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