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- Editorials | Mauldin Economics
Some thoughts from John Mauldin:
Junk bond issuance is over 2.5 times what it was in 2006 and twice as high as a percentage of total corporate bond issuance. Leveraged loans are back to all-time highs, even as credit spreads continue to fall.
Collateralized loan obligations (CLOs) are close to all-time highs after almost disappearing in 2009. And subprime auto-asset-backed paper is projected to set a new record in 2014.
The Bundesbank … they have the largest derivatives portfolio, at $70 trillion (but don’t worry because it all nets out, sort of, and of course there is no counter-party risk!), and they are the most highly leveraged bank in Europe (at 60:1 in the last tests — not a misprint), which might give you pause.
John goes into many other subjects in his wide-ranging article. Free registration is required to read the entire thing.
We aren’t as Austrian School as John, but he’s only a bit Austrian-of-center.
- Luxury sales drive Manhattan home prices higher – Jan. 3, 2014
Even in Harlem and other northern Manhattan neighborhoods, chic new condos command lofty prices — sometimes more than $1.5 million for a two-bedroom apartment of under 1,200 square feet.
- Tour S.F.’s below market units: our most affordable real estate – On The Block
Owner Occupancy: BMR [Below Market Rate] units are intended to be owner-occupied at all times and used as a principal residence for the duration of ownership.
Renting: BMR units are intended to be owner-occupied and never used as investment property.
- Bill for Cleaning China’s Air Pollution – $290 Billion
While the extraordinary growth of the Chinese economy has been the business success story of the past two decades, it has come with high environmental costs due to rampant pollution.
Now the cost for cleaning up China’s notorious air pollution has been given a price tag – $290 billion, according to Chinese Academy for Environmental Planning deputy head Wang Jinnan. Wang presented his estimate at the 4th Caixin Summit in Beijing.
But the staggering investment has an upside, as Wang reported that the investment would increase China’s GDP by nearly $315 billion and create over 2 million jobs.
It’s very good that they know there’s an upside.
Why wouldn’t all this new production have a more dramatic effect on the price of oil? The answer is that, had it not been for the increase in tight oil production in the U.S. and oil sands from Canada, global oil production would actually have declined between 2005 and 2012. And the growth in oil consumption from the emerging economies has eaten up more than all of this new production.
- Arthur Laffer Interview – Business Insider
“Inflation does not appear to be monetary base driven,” he said.
The “he” there is none other than Arthur Laffer of Ronald Reagan’s Economic Policy Advisory Board and “Laffer Curve” fame.
What the article doesn’t mention is that it was Milton Friedman who made famous the incorrect statement: “Inflation is always and everywhere a monetary phenomenon.”
Contrary to the traditional view, the velocity of money (https://research.stlouisfed.org/fred2/series/MZMV) in conjunction with the supply and the lack of corresponding real growth is what causes price inflation.
- Turkey first of Fed Taper victims as political crisis scares investors – Telegraph
Turkey has gone from star performer to ‘sick man’ of the emerging market block as the Fed begins to taper bond purchases, a move that threatens to set off a further rotation of funds back into US dollar assets.
Turkey is the most vulnerable of the emerging market nexus
An estimated $4 trillion of foreign capital has flowed into the developed world since 2009, much of it ‘hot money’ chasing asset bubbles. Regulators are nervously eyeing yields on 10-year Treasuries as they touch 3pc, levels that could set off a scramble for dollars.
A stronger dollar is just what the Fed doesn’t want. It’s disinflationary.
- EconoMonitor : Great Leap Forward – The Fed Can Set Mortgage Rates: Guest Post by Warren Mosler
As we had feared:
Unfortunately for the Fed mortgage rates moved higher after the announcement, and not due to a burst of mortgage applications (see above charts), and not due to any immediate drop in Fed purchases, which continue in large size. Instead, what the Fed sees is a market that believes the Fed changed course because it believes the economy is recovering, and with recovery just around the corner rate hikes will come sooner rather than later.
And with rate hikes on the way, investors would rather wait for the higher yields they believe are just down the road, than take the lower yields today.
Therefore,if you want to borrow today to buy a house, you have to pay investors a higher interest rate. And if you don’t want to pay the higher rate today, investors are willing to wait for those higher rates, and the house doesn’t get sold. And when the house doesn’t get sold the Fed leaves rates low for that much longer and their forecast again (they’ve been over estimating growth for 5 years now) turns out to be wrong.
Many real-estate organizations use cloud services. They need to take data-security very seriously.
“Encryption is only as secure as its key management system,” Chiu said. “While cloud providers may implement encryption, customers need to be aware that if providers hold encryption keys, it’s still possible that they can access data — or provide the keys to someone who requests them.”
Such concerns have sparked increased interest in approaches that let enterprise users of cloud services to own the encryption and cryptographic key management process while data is at rest, in use and in transit.
A growing number of vendors, including Vaultive, CipherCloud, TrendMicro and HyTrust, offer tools designed to make it easier for businesses to retain more control of their data while taking advantage of cloud hosted infrastructures and services.
CipherCloud, for instance, sells a gateway technology that lets companies encrypt data while in transit to and from the cloud and while stored. The gateway lets enterprises store encryption keys locally, and to interact with the encrypted data in the cloud.
Such technologies mean that government agencies would have to seek help from the owners of data to gain access. The goal is to eliminate the handing over of such keys to government agencies by cloud vendors without the knowledge of the data owners.
- Fewer Vehicles Named Top Safety Picks as IIHS Toughens Standards | PropertyCasualty360
Are you using your vehicle a great deal in your investing business? Even if you aren’t, vehicle safety may still be, and we think should be, high on your list.
For 2014, a good or acceptable small overlap performance is required for Top Safety Pick, while vehicles earning the Top Safety Pick+ designation must also provide front crash prevention systems intended to help drivers avoid rear-ending a stopped or slower-moving vehicle in front of them. IIHS [Insurance Institute for Highway Safety] says front crash prevention systems include both warning systems and automatic braking.
Interestingly, with front crash prevention systems spreading so quickly through vehicle fleets, the number of Top Safety Pick+ winners for 2014 (22) outnumbers the list of Top Safety Pick winners (17).
… it is hard to get accurate values from Zillow, but they do show recent sold comps in neighborhoods.
In the article, BPO stands for “Broker Price Opinion.”
- Global house prices: Castles made of sand | The Economist
HOUSE prices are now rising in 18 of the 23 countries we track across the globe, compared with just 12 a year ago. America tops our table: the Case-Shiller index released on New Year’s Eve reported price increases of 13.6% in the year to October 2013. Homes have risen in value by 24% since their March 2012 trough, but they remain 20% below their peak in April 2006.
Builders started work on over 1m new homes in America in the year to November, for only the second time since the financial crisis ended. But this is far short of the 2.3m recorded in January 2006, and below the long-run average of 1.5m. In all, American property is enjoying a recovery but not a bubble.
- Investors may flirt with riskier real estate strategies in new year – Pensions & Investments
“Looking ahead, I would fully believe investors would take advantage on value added and opportunistic strategies instead of focusing on core,” said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co. The riskier strategies appear to be a better opportunity because of the risk-return spread between them and core.
Mr. Morrow does not expect a wholesale switch of capital out of core for value added and opportunistic real estate. Instead, he expects investors to begin using riskier strategies with a little more return potential “at the margins.”
Spooked by a series of earthquakes since November, hundreds of people at a town hall meeting Thursday evening let state officials know they are frustrated about the absence of explanations for the outbreak.
They were still frustrated when they went home.
At times the meeting, while generally orderly, turned raucous as participants yelled out support for a homeowner’s story or hooted when railroad commission representatives said they don’t know what is causing the unusual seismic activity on the western edge of the Metroplex.
Most of the speakers had their own idea about the cause: natural gas production in the Barnett Shale that underlies much of the western Metroplex.
What’s happened to property values?
- Environmental impact of hydraulic fracturing in the United States
Should you avoid investing in real estate in fracking areas, including abandoned wells? This Wikipedia section deals primarily with groundwater concerns, which are among a number of other environmental/health concerns.
Documentation Issues. As development of natural gas wells in the U.S. since the year 2000 has increased, so too have claims by private well owners of water contamination. While the EPA recognizes the potential for contamination of water by hydraulic fracturing, in May 2011 EPA Administrator Lisa P. Jackson testified in a Senate Hearing Committee stating “I’m not aware of any proven case where the fracking process itself has affected water…”. One reason for a seeming lack of documentation is the current practice of sealing the documents after a court case. While the American Petroleum Institute “dismissed the assertion that sealed settlements have hidden problems with gas drilling,” some feel it represents an unnecessary risk to public safety and health. Despite these setbacks, there are, however, cases of contamination have been documented both before and after her testimony.
2004 EPA study
A 2004 study by the EPA concluded that the injection of fracking fluids into coalbed methane (CBM) wells posed a minimal threat to underground drinking water sources. An early draft of the study discussed the possibility of dangerous levels of fracking-fluid contamination, and mentioned “possible evidence” of aquifer contamination; both these points were absent from the final report, which concluded that fracking “poses little or no threat to drinking water”. An agency whistle-blower said shortly after publication that the absence could be explained by strong industry-influence and political pressure. The scope for the study focused on the injection of fracking fluids, while ignoring other aspects of the process such as disposal of fluids, and environmental concerns such as surface water quality, fish kills and acid burns; the study was also concluded before public complaints of contamination started emerging.:780 In 2005, hydraulic fracturing was exempted by US Congress from any regulation under the Safe Drinking Water Act, possibly due to this EPA report.
However, it is important to note that not every instance of groundwater methane contamination is a result of hydraulic fracturing. Often, local water wells drill through many shale and coal layers that can naturally seep m ethane into the producing groundwater. This methane is often biogenic (created by organic material decomposition) in origin as opposed to thermogenic (created through “thermal decomposition of buried organic material”). Thermogenic methane is the methane most often sought after by oil & gas companies deep in the earth, whereas biogenic methane is found in shallower formations (where water wells are typically drilled). Through isotope analysis and other detection methods, it is often fairly easy to determine whether the methane is biogenic or thermogenic, and thus determine from where it is produced.
University of Texas study
Proponents of hydraulic fracturing have incorrectly reported in the press and other media that the recent University of Texas Study (“Fact-Based Regulation for Environmental Protection in Shale Gas Development”) found that hydraulic fracturing caused no environmental contamination, when in fact the study found that all steps in the process except the actual injection of the fluid (which proponents artificially separated from the rest of the process and designated “hydraulic fracturing”) have resulted in environmental contamination. The radioactivity of the injected fluid itself was not assessed in the University of Texas study. The other stages or “phases of the shale gas development life cycle” into which hydraulic fracturing has been divided in various reports are (1) drill pad construction and operation, (2) the construction, integrity, and performance of the wellbores, (3) the flowback of the fluid back towards the surface, (4) blowouts and spills, (5) integrity of other pipelines involved and (6) the disposal of the flowback, including waste water and other waste products. These stages were all reported to be sources of contamination in the University of Texas study. The study concluded that if hydraulic fracturing is to be conducted in an environmentally safe manner, these issues need to be addressed first. The distortion seemed only to be the focus on the injection stage. The study’s objectivity was later called into question because Groat failed to disclose his energy industry ties.
There are extensive links between UT and the oil & gas industry, with the giving of Royal Dutch Shell to the university currently standing at more than $24.8 million, $4m alone having been handed over for 2012. Since 2011, Shell has partnered Texas in a program called , and the university has a similar research program in place with Exxon Mobil. Halliburton, the largest supplier of fracking services in the United States, has also given millions of dollars to the university. Statoil announced a $5m research agreement (part of which will focus on oil shale) with UT’s Bureau of Economic Geology in September 2011. The study concluded that if hydraulic fracturing is to be conducted in an environmentally safe manner, these issues need to be addressed first.
The University of Texas Study described the environmental impact of each of the separate parts of the overall hydraulic fracturing process, or “phases of the shale gas development life cycle.” These parts include of (1) drill pad construction and operation, (2) the construction, integrity, and performance of the wellbores, (3) the injection of the fluid once it is underground (which proponents consider the actual “fracking”), (4) the flowback of the fluid back towards the surface, (5) blowouts, often unreported, which spew hydraulic fracturing fluid and other byproducts across surrounding area, (5) integrity of other pipelines involved and (6) the disposal of the flowback, including waste water and other waste products. Associated problems include (1) Groundwater Contamination, (2) Blowouts and House Explosions, (3) Water Consumption and Supply, (4) Spill Management and Surface Water Protection, (5) Atmospheric Emissions, (6) Health Effects Proponents have reported that groundwater contamination doesn’t come directly from the “fracking” part of the process (the injection of hydraulic fracturing chemicals into Shale rock formations) but from other parts of the hydraulic fracturing process, such as leaks in its fluid or waste storage apparatus. One review says that methane in well waters in some areas probably comes from natural sources. Injection cannot be accomplished, however, without the accompanying stages. Wellbores and pipelines can have faulty construction or be damaged during the process, all
owing the fluid to flow into aquifers. The waste water evaporation ponds allow the volatile chemicals in the waste water to evaporate into the atmosphere. The ponds may overflow when it rains, and the runoff will eventually makes its way into groundwater systems. Groundwater may become contaminated when poorly constructed pipelines used to transport the waste water to water treatment plants leak or break, allowing the waste water and fracking chemicals to flow into groundwater systems. The transportation by trucks and storage of fracking chemicals allows for groundwater to become contaminated when accidents happen during transportation to the fracking site or to its disposal destination. Disposal of fracking fluid by injection can cause earthquakes, and release of unprocessed or under-processed waste water into rivers can contaminate water supplies.
Gasland. In 2010 the film Gasland premiered at the Sundance Film Festival. The filmmaker claims that chemicals including toxins, known carcinogens, and heavy metals polluted the ground water near well sites in Pennsylvania, Wyoming, and Colorado. The film was criticized by oil and gas industry group Energy in Depth as factually inaccurate; in response, a detailed rebuttal of the claims of inaccuracy has been posted on Gasland’s website. The Colorado Oil and Gas Conservation Commission, a state agency, based on its own investigations, pointed out scientific errors made in the film and on the Gasland website concerning supposed cases of water wells contaminated by hydraulic fracturing.
2011 Massachusetts Institute of Technology report. A 2011 report by the Massachusetts Institute of Technology addressed groundwater contamination, noting “There has been concern that these fractures can also penetrate shallow freshwater zones and contaminate them with fracturing fluid, but there is no evidence that this is occurring. There is, however, evidence of natural gas migration into freshwater zones in some areas, most likely as a result of substandard well completion practices by a few operators. There are additional environmental challenges in the area of water management, particularly the effective disposal of fracture fluids”. This study encourages the use of industry best practices to prevent such events from recurring.
Jackson County, West Virginia, 1987
An E.P.A. report from 1987 indicated that fracture fluid had contaminated James Parson’s water well in Jackson County, West Virginia. The well, drilled by Kaiser Exploration and Mining Company, was found to have induced fractures that created a pathway to allow fracture fluid to contaminate the groundwater from which Mr. Parson’s well was producing. There still however exists much contention between the oil and gas industry and the E.P.A. on the accuracy and thoroughness of this report.
In the town of Dimock, Pennsylvania, 13 water wells were contaminated with methane (one of them blew up). Arsenic, barium, DEHP, glycol compounds, manganese, phenol, and sodium were also found in unacceptable levels in the wells. As a result, Cabot Oil & Gas was required to financially compensate residents and provide alternative sources of water until mitigation systems were installed in affected wells. The devices needed to prevent such water contamination cost as little as $600. The company denies that any “of the issues in Dimock have anything to do with hydraulic fracturing”. The Pennsylvania Department of Environmental Protection blamed the problem s on “insufficient or improper cemented casings” in the Cabot wells, rather than on fracking.
On Dec. 2, 2011, EPA sent an email to several Dimock residents indicating that their well water presented no immediate health threat. On Jan. 19, 2012, the EPA reversed its position, and asked that the agency’s hazardous site cleanup division take immediate action to protect public health and safety. EPA began follow up testing and sampling local water supplies in Dimock in early 2012. In May 2012 EPA reported that their most recent “set of sampling did not show levels of contaminants that would give EPA reason to take further action.” Methane was found only in one well. Cabot has held that the methane was preexisting, but state regulators have cited chemical fingerprinting as proof that it was from Cabot’s hydraulic fracturing activities. Both Duke University and University of Rochester are conducting studies of the age of the well water to confirm the sources of the various contaminants. EPA plans to re-sample four wells where previous data by the company and the state showed levels of contaminants.
Duke University study, Pennsylvania and New York, 2011
A Duke University study in 2011 examined methane in groundwater samples from 68 water wells in Pennsylvania and New York states overlying the Marcellus Shale and the Utica Shale. The study area included six counties in the two states, and included the Dimock, Pennsylvania area, where gas wells were known to have leaked methane. The study determined that groundwater tended to contain much higher concentrations of methane, some with potential explosion hazard, near fracked gas wells. The methane’s isotopic signature identified it as thermogenic methane like that in the gas wells. The lack of traces of fracking fluids or deep saline brines in the groundwater samples led the authors to conclude that the most likely causes for the methane contamination were leaky gas-well casings.
Duke University study, Pennsylvania, 2013
On June 24, 2013, researchers from Duke University reported detecting methane in drinking water in Pennsylvania and claim “serious contamination from bubbly methane is ‘much more’ prevalent in some water wells within 1 kilometer of gas drilling sites“. The researchers noted that methane levels were “an average of six times” higher and ethane levels were “23 times higher” in the water wells “closer to drilling sites, compared with those farther away.”
Complaints from a few residents on water quality in a developed natural gas field prompted an EPA groundwater investigation in Wyoming. The EPA reported detections of methane and other chemicals such as phthalates in private water wells. A draft report released by the EPA on December 8, 2011 suggested that the ground water in the Pavillion, Wyoming, aquifer contains “compounds likely associated with gas production practices, including hydraulic fracturing”. The EPA discovered traces of methane and foaming agents in several water wells near a gas rig. Samples of water taken from EPA’s deep monitoring wells in the aquifer were found to contain synthetic chemicals (e.g., glycols and alcohols) used in gas production and hydraulic fracturing fluid, and high methane levels. Benzene concentrations in the samples were well above Safe Drinking Water Act standards.
The report results aren’t pretty. Wading through a mess of chemical terms and testing jargon, we get to the nitty gritty: “detections of high concentrations of benzenes, xylenes, gasoline range organics, diesel range organics and … hydrocarbons in ground water samples from … wells near pits indicates that (frack) pits are a source of shallow ground water contamination,” the report says. At some wells the researchers found “water near-saturated in methane” and in deep water wells, they also found chemicals used during the fracking process: gasoline, diesel fuel, BTEX (benzene, toluene, ethylbenzene, xylene), naphthalenes, isopropanol, and a whole slew of other things that you’d rather not drink. The report continues: “Detections of organic chemicals are more numerous and exhibit higher concentrations in the deeper of the two monitoring wells … (which) along with trends in methane, potassium, chloride, and pH, suggest a deep source of contamination.”</ref>
Their observations of chemical reactions in the field led them to suggest that upward migration of chemicals from deep underground is the culprit. They also found that the reports companies filed detailing jobs listed chemicals as a class or as “proprietary,” “rendering identification of constituents impossible.”
The draft report also stated: “Alternative explanations were carefully considered to explain individual sets of data. However, when considered together with other lines of evidence, the data indicates likely impact to ground water that can be explained by hydraulic fracturing.” Industry figures rejected the EPA’s findings. Questions about the agency’s testing procedures, however, led the EPA to agree to additional testing in order to clarify questions about the protocols followed in the draft report. The EPA did not abandon the conclusions in its draft report, but it did suspend the independent scientific review process until the additional testing was completed.
The EPA report stated concerns about the movement of contaminants within the aquifer and the future safety of drinking water in the context of the area’s complex geology. EPA’s sampling of Pavillion area drinking water wells found chemicals consistent with those reported in previous EPA reports, including but not limited to methane and other petroleum hydrocarbons, indicating migration of contaminants from areas of gas production. In response, in 2010 the U.S. Department of Health and Human Services‘ Agency for Toxic Substances and Disease Registry recommended that owners of tainted wells use alternate sources of water for drinking and cooking, and ventilation when showering. Encana is funding the alternate water supplies, but denied responsibility for the contamination. During the investigation Luke Chavez (EPA investigator), commented that the contaminants could have come from cleaning products or oil and gas production, but said that in either case, their presence suggested problematic practices. Shortly after the release of EPA’s draft report on Pavillion, however, questions about the agency’s testing procedures began to mount, and in March 2012 the EPA agreed to additional testing to clarify questions and other concerns. Although the EPA did not state that it was abandoning the conclusions in the draft report, it did suspend the independent scientific review process until the additional testing was completed. In 2012 the U.S. Geological Survey tested one of two EPA monitoring wells near Pavillion, Wyoming, and found evidence of methane, ethane, diesel compounds and phenol, which the EPA had also identified in its 2011 report. Rob Jackson, an environmental scientist at Duke University, described the methane, ethane, and propane concentrations as very high, consistent with fossil fuel rather than natural sources. The EPA has retested water in Pavillion, and has briefed the homeowners, but has not yet released the results to the public. Pavillion resident John Fenton reported that the EPA told him the recent test results were consistent with previous results, and that the EPA recommended that they don’t cook with or drink their water.
In June 2013, the EPA announced that it was closing its investigation at Pavillion, and would not finish or seek peer review of its preliminary 2011 study. Further investigation will be done by the state of Wyoming.
In 2006 drilling fluids and methane were detected leaking from the ground near a gas well in Clark, Wyoming; 8 million cubic feet of methane were eventually released, and shallow groundwater was found to be contaminated.