The gun at Ireland’s head, Saudi maneuvering and more on US elections

US elections

Just to follow up on yesterday’s two posts, exit polling data from Tuesday confirm what I was saying about disenchantment with the U.S. economy despite the positive headlines. 58% of those casting ballots said they were dissatisfied with or angry at the President. While the numbers against Congress were also high, it is clear that voters have taken it out on the President in large measure because the Democratic base is dispirited and did not show up at polls as much as Republicans. Moreover, exit polls also said point blank that voters don’t believe in the recovery. Here are some big takeaways via the Wall Street Journal:

60% of voters polled said they felt the U.S. economic system “favors the wealthy.” Roughly four out of every five America voters were either “very worried” or “somewhat worried” about the direction of the economy in the next year, and just 22% said they were “not at all worried” or “not too worried,” the results show.

Just 1% of voters felt the economy was “excellent.” Roughly 70% said the economy was “not so good” or “poor.”

When asked whether the economy was getting better, getting worse, or roughly the same, voters were split evenly between the three choices.

And when asked if a voter’s family financial situation had improved in the past two years, just 29% of respondents said it had.

Also, yesterday the President said he would unilaterally pass immigration reform via executive order without Congress. This is a bad sign of the potential for legislation and makes a gridlock scenario more likely.

While dysfunction favours a cut in net transfers to the private sector, let’s remember that government deficits are mostly endogenous. Most of the US economy is in the domestic private sector. And to the degree we see trends there that are positive for growth i.e. wage growth, capital investment and consumption growth, what happens at the federal level is less important because deficits will come down automatically as the economy expands. On the other hand, a weaker domestic private sector economy would mean higher deficits, which could become a lightning rod of anti-deficit sentiment, creating an exogenous policy response to reduce them. Q4 and Q1 2015 will be critical on this score.


Oil looks oversold to me at these levels. But the real question is Saudi Arabia. Ostensibly, the Saudis are trying to regain market share in the US by cutting price. The Saudis sell a heavier sour crude than the stuff coming out of the frackers’ wells. And U.S. refining capacity is still geared to light sweet, by and large. So the impetus to cut price is well-founded despite all of the rumours we hear about ulterior motives. The question is how much will the Saudis pursue their own self-interest regarding market share, when they are hurting other OPEC producers. Venezuela, in particular, is crying out for relief, and needs oil prices closer to $100 a barrel to avoid a sovereign default.

The frackers are in some pain. By most accounts, there are different breakevens depending on the well formation. Marin Katusa pointed this out on Boom Bust’s oil show several days ago. For example, EOG Resources says it can survive at $40 based on its drilling costs at Eagle Ford. But, according to ITG Investment Research, Cana Woodford producers in Oklahoma need $100 to breakeven and the Anadarko formation in Texas and Oklahoma has a breakeven around present prices of $79 a barrel. ITG says Bakken and Permian producers can make it at $14-16 less.

Overall then, if we get well into 2015 with oil at these levels, there will be a slowing in production and well counts. That is a definite. The big unknown is how investors will react or overreact if oil prices stay depressed for longer. The potential for investors to stop funding new investment is clear.

On the flip side, Anadarko Petroleum’s Frank Patterson, who heads international exploration warns that young geologists are learning a lot of shale well drilling processes at the expense of exploration expertise. He believes this could be a problem down the line. If so, it would be similar to the problem after the oil bear market in the 1980s hollowed out many oil companies middle management in a way that came back to bite the industry when the next oil bull market resumed. This is not a problem now, but something to flag for further down the line.

US economy

I still expect non-farm payrolls to average 250-350,000 over the next several months, up from an earlier 200-300,000 pace because the initial jobless claims level has dipped so low. ADP came out with a 230,000 number for October, which is the seventh month in a row of 200,000+ jobs gains in the U.S. private sector. Expectations are for non-farm payrolls of 231,000 tomorrow. I think the risk is to the upside.

In addition, Q4 GDP growth estimates are now tracking 2.2-3.0%, which seems reasonable at this point. But expect reversion to a 2%ish number over the next couple of quarters unless we see continued signs of wage gains picking up. The average hourly earnings number and hours worked are going to be just as important tomorrow as the unemployment number or the non-farm payrolls.


In Ireland, there are a number of interesting threads to note. First, everyone is making hay out of the CNBC video showing Joe Kernan seemingly unaware that Ireland was a member of the euro. It is playing in Ireland as another example of hidebound and ignorant Americans. The second thread to note is that while the EU has downgraded growth estimates for Europe to below 1%, Ireland is expected to grow 4.6% this year, the best in the Eurozone. That’s helping the Irish retire their bailout bonds and issue 15-year paper. We can think of Ireland as having fully recoupled to core Europe now.

The last bit making news in Ireland is the ugliness from the bailout in November 2010. Trichet’s letter to Finance Minister Lenihan has been published by the Irish Times and the Irish are aghast at the directness of it. Basically, Trichet tells Lenihan that the ELA commitments to Irish banks had become excessive and the ECB was going to cut them off because they were insolvent unless the Irish government sought a bailout with serious austerity measures and guarantees for the Irish banks. Here’s how I reported it at the time. This should come as no surprise because we saw similar outcomes with Greece and Cyprus. But the incident does make the lack of sovereignty clear and is a good reason for European national governments to want to keep debt and deficits low. The lack of sovereignty effectively biases governments toward policies that weaken growth.

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