*Justice Department Drops Demand For Apple’s Help To Access Terrorist’s PhoneYes, more to come.
*Court Filing Says FBI Has Accessed Gunman Farook’s iPhone
*Move Delays A High Stakes Showdown Between Washington, Silicon Valley
(More to come.)
The Atlanta Federal Reserve‘s tool for forecasting first quarter gross domestic product took a steep drop Monday, falling from 1.4% to just 0.6%. That’s well below the consensus of economist opinion, which predicts growth for the current quarter between roughly 1.4% and 2.7%.And from Barron's confrères at the WSJ's MoneyBeat:
The GDP Now drop was due to the decline in net exports and decrease in personal consumption expenditures released Monday. The Q1 GDPNow estimate was as high as 2.3% in mid-March, but has been falling with each key release. Last week the forecast fell from 1.9% to 1.4% because of weak numbers in the durable goods and housing reports.
The U.S. economy grew at at 2% rate in the third quarter and a 1.4% rate in the fourth quarter, according to the Department of Commerce’s final estimate released on March 25.
The advance estimate for the first quarter won’t be out until April 28. The delay is the reason why the GDPNow tool was created.
Here’s how Mizuho Securities USA economist Steven Ricchiuto analyzes Monday’s economic reports that led to Monday’s steep drop:
The net read on the economy from these three data releases is that the economy remains stuck in a 1.75% to 2.25% growth band....MORE
Crude-oil prices are rising, and gas is going back up, but it hasn’t filtered down to the inflation numbers yet. That most likely means no added pressure on the Federal Reserve.
This morning, for the 46th month in a row (3.8 years if you’re counting at home), the government released figures on inflation that were below the Fed’s self-imposed threshold of 2%. The core personal consumption expenditures (PCE) index was up 0.1% from a month ago, and 1.7% from a year ago, below the Fed’s 2% target. While the 1.7% figure is highest since late 2012-early 2013, it is also flat with January’s level.Earlier:
It is also still below the most recent reading on inflation via the consumer price index. Core CPI was at 2.3% in February from a year ago. But that figure in the Fed’s eye is less important than the PCE figure.
How far the Fed is willing to let inflation run is a source of some consternation. Chairwoman Janet Yellen fielded questions at her press conference two weeks ago about whether the Fed was consciously going to let inflation overshoot its target, a sort-of make-up call if you will, and what that means for the bank’s credibility.
The PCE index is very similar to the CPI index, but there are subtle differences. PCE measures the change in prices of goods and services, while the CPI measures “out of pocket expenditures.” The PCE index gets its data primarily from business surveys, while the CPI relies mainly on consumer surveys. There are other differences in the formulas used and weights given to various items. The Fed looks at both, and other measures of rising prices as well, but has long been adamant that the core PCE index is its favorite gauge....MORE
Mickey Levy, Chief Economist for the Americas and Asia, Berenberg Capital Markets, LLC and member of the Shadow Open Market Committee, is correct when he writes:
The Fed cannot continue to tout that its policy is “data dependent” when recent data reflect that the Fed has effectively achieved its dual mandate, yet it doesn’t raise rates and indicates sustained extremely easy monetary policy.With the modification of its dual mandate, this very activist Fed obviously is pursuing something more. It is basically saying that it aims to overheat the economy and that it will tolerate inflation above 2%, with the goal of further labor market improvement. Improvement includes both broader measures of unemployment—such as U-6, which includes workers that are designated as “marginally attached to the labor force” and “part-time for economic reasons”—and wage gains. In doing so, the Fed is understating the distortions it is generating and the higher risks of financial instability.The Fed is nowhere near ready to raise interest rates high enough to fight off the developing accelerating price inflation....MORE
It’s been getting cheaper to drill and complete oil and gas wells since 2012.
A new report from the U.S. Energy Information Administration found that average well drilling and completion costs last year had fallen 25 to 30 percent below 2012 prices – the high point of the last decade.
The report, by IHS Global Inc., looked at four shale fields – the Bakken in North Dakota and eastern Montana, the Eagle Ford in South Texas, the Marcellus in Pennsylvania, and two Permian Basin shale plays (the Midland and Delaware basins) – as well as offshore federal Gulf of Mexico. IHS looked at 2006 through 2015, and made forecasts to 2018.
The price swings for drilling and completion have followed the price of oil – expensive in the early days of the shale boom when oil prices were high, and tumbling as oil prices fell.
Starting around 2011, an increase in drilling resulted in “shortages of supply and increased costs.”
“The oil price collapse of 2014 forced changes upon the market, including capital cost reductions, downsized budgets and more focused concentration on better prospects within these plays,” the report said.
Here’s how well costs dropped in recent years:FuelFix homepage
IHS expects rig rates to fall by 5-10 percent this year, but increase 5 percent in 2017 and 2018.
- Bakken well costs were $7.1 million in 2014, but $5.9 million in 2015.
- Eagle Ford wells averaged $7.6 million in 2014, but $6.5 million in 2015.
- Marcellus wells were $6.6 million in 2014, but $ 6.1 million in 2015.
- Midland Basin wells (in the Permian Basin) were $7.7 million in 2014, but dropped to $7.2 million in 2015.
- Delaware Basin wells (in the Permian Basin) cost $6.6 million in 2014 and fell to $5.2 million during 2015.
You can read the full report here.
Strict regulation has been choking out financial innovation in the world’s third-biggest economy.
A laggard in embracing the ‘fintech’, or financial technology, revolution, Japan is set to ease investment restrictions that could free up the flow of capital in an economy sitting on an estimated $9 trillion in individuals’ cash deposits.
Strict regulation, easy access to credit due to rock-bottom interest rates, and weak demand for innovative financial services from a risk-averse population that still prefers cash to credit cards, have strangled fintech’s advance in Japan.
Fintech ventures—usually start-ups leveraging technology from cloud data storage to smartphones to provide loans, insurance and payment services—raised $2.7 billion in China last year, and over $1.5 billion in India, according to CB Insights data. Ventures in the United States attracted investment of around $7.4 billion.
In comparison, investment in Japanese ventures reached only around $44 million in the first nine months of 2015.
Now, Japan’s financial industry regulator hopes relaxed rules on investing in financial ventures, and a new system for regulating virtual currency exchanges will pass through parliament by May—a first step in kickstarting the fintech revolution in the world’s third-biggest economy.
“The law changes aren’t a goal, but a first step,” Norio Sato, a senior official at the Financial Services Authority (FSA), told Reuters. “Fintech will have a big impact on financial services.”
The changes, which will allow banks to buy stakes of up to 100% in non-finance-related firms, will free up Japan’s three megabanks to enter into tie-ups with fintech ventures developing services including robotic investment advisory and blockchain, the decentralized ledger technology behind the bitcoin digital currency.
Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group have said they are eyeing such investments, having previously been restricted to holding stakes of only 5-15% in start-ups.
Under pressure from weak loan demand, the megabanks see an opportunity to earn money through fintech, but are also aware of its potential to disrupt traditional business models.
The unpromising fintech environment in Japan—which was blindsided by the high-profile collapse of the Mt. Gox bitcoin exchange in 2014 when hackers stole an estimated $650 million worth of the digital currency—has seen some entrepreneurs go overseas for funding....MORE
On March 21, the Orlando suburb Altamonte Springs is starting a pilot program that pays for part of riders' Uber fares. This misguided year-long initiative has a budget of $500,000 and will cover 20 percent of each fare for rides within the city's limits and 25 percent of each fare for rides that start or end at mass transit stations.
Altamonte Springs is not alone in its push to subsidize Uber. Pinellas County in the Tampa Bay area just started a pilot program that pays up to $3 per trip to riders who take Ubers or taxis to bus stops. While the intentions behind both of these localities' subsidies are to increase access to government-provided transportation, subsidizing Uber—and taxis—is an expensive, pointless, and distortionary mistake.
University of Chicago economics professor Casey Mulligan told me, "A subsidy creates two prices: one that riders pay and the other that Uber receives." In other words, though consumers may see a lower price, the difference between the discounted price and the full cost of a ride must be paid by someone (usually taxpayers). Additionally, subsidies push prices up by making it appear that prices are lower and artificially raising demand (see the cases of subsidies for student loans, sugar, film, and professional sports stadiums, just to name a few). These effects could lead to an outcome that simply transfers funds from taxpayers to Uber, with little effect on riders' fares.
Yet, support for Uber subsidies continues to grow. This is likely because the so-called "last mile" problem of how to get to and from a mass transit system has plagued mass transit since its inception, leaving many residents underserved by existing options. Ridesharing has the potential to solve this problem, and proponents of subsidies argue that paying for Uber rides is the most cost-effective solution.
Uber has already helped to solve the last mile problem—without any taxpayer assistance. Last year, Uber released a case study of its effects on Chicago's mass transit system. The study found that, "Chicago's public transit system provides frequent, efficient, and convenient service across the city, but it only goes so far. Uber offers residents of areas underserved by public transit a reliable and fast link to public transportation, effectively expanding the coverage of existing transit networks."
This experience is not unique to Chicago. Out of all the Uber trips in Portland in February 2015, 25 percent started or ended within a quarter mile of a mass transit station. A similar trend was seen in Austin during a summer 2015 analysis of the city's Uber trips....MORE
Fei-Fei Li, a Stanford University professor who is an expert in computer vision, said one of her Ph.D. candidates had an offer for a job paying more than $1 million a year, and that was only one of four from big and small companies.
--John Markoff and Steve Lohr, NYT, on the brains arms race in artificial intelligence
To this day, Microsoft Office remains the dominant office software suite, a position it has held since the 1990s. While competitors have emerged to appeal to different customer niches (Google Docs with collaboration or iWork for Mac users), for many people the value of using Office lies in the fact that many others use it; it has stood the test of time. This illustrates one of the strategic benefits of platforms: Once established, they are hard to dislodge. Exit from a platform usually requires customers to leave in a coordinated fashion.Among other things, a platform is a device for coordinating the choices of many individuals. By contrast, disruption, and particularly demand-side disruption of the type put forward by Clay Christensen, is a force that relies on a steady process of picking off one customer at a time. Kodak did not end up losing the film business because one day nobody wanted film. Instead, they lost the market one customer at a time as people found alternatives in the form of digital photography. And those customers did not have to think about whether their friends were willing to look at pictures taken digitally. They could make decisions of their own accord.Given this, it might be tempting to conclude that platforms, once established, cannot be disrupted. Yes, there might be a niche group who are underserved, but as long as what ultimately matters is who else is on the same platform, no entrant who targets just that niche will be able to do any competitive damage.A case in point is the continual forecasts of Facebook’s demise. The usual narrative goes like this: Facebook did well when it was just young people, but when parents joined, the future supply of youth (namely teenagers) dried up and went elsewhere. As a result, Facebook will slowly be disrupted as its active customer base ages.While there is something to this baseline theory — Google+, a would-be disruptor, premised its entry on allowing users to segment their friends and family into circles — Facebook continues to go from strength to strength. Young people do avoid their parents, but they do this by moving some, though not all, of their social media interactions elsewhere. They remain active on Facebook even if their activity fluctuates in both intensity and nature as they grow.Facebook appears to have been on alert for potential disruptive threats, which have come largely from other platforms. When Instagram demonstrated that sharing photos on mobile devices was a new social media platform, Facebook acquired it. When WhatsApp demonstrated that messaging was alive and well in a pure form, Facebook acquired it. In each case Facebook paid handsomely — but did little else. Both companies, while under a corporate umbrella, operate as independent brands with largely independent development teams. In effect, Facebook bought an option against possible disruption but did not want to touch or risk anything else about those companies.Facebook’s tactic appears similar to that of other established companies: It controls possible disruptive events that appear to pick off customers based on initially niche cases by buying the competition.But what of disruptive effects of a different nature? What if disruption comes instead — as I outline in the April 2016 issue of HBR — from the supply side?Supply-side disruption arises when a new innovation or technology offers a better way of providing consumer value than the old technology does. For instance, the iPhone was an innovation to the architecture of mobile devices (specifically, how the user interacted with software and hardware) rather than offering any new components. That architecture permitted a rapid deployment of technologies to create the mobile internet, something that established handset makers simply were not in a position to match. Doing so would have completely upended their product development organization. Any capabilities they had were eroded quickly.Can such a supply-side effect disrupt a platform?...MORE
Rocket Internet needs to embrace the fact it's a venture capital firm at heart, not an internet business, if it's to win back investor confidence.We've been checking in on Rocket since 2014's "Climateer Line of the Day: Venture Capital Economy Edition" which had the prospectus quote.
When the company went public in October 2014, founder Oliver Samwer pitched Rocket as an "operating platform company" that used its expertise to build e-commerce and financial technology start-ups in emerging markets.
But from the outset, the Berlin-based company has faced criticism it's opaque, overly complex, and difficult to value. With its shares down more than 40 percent since the IPO, Rocket needs to embrace change.
It could start by explaining what it actually is. While Rocket's founders describe it as a start-up incubator with 250 engineers who bring technical know-how to its companies, its model resembles that of a venture capital fund that happens to be publicly traded.
Rocket backs dozens of young firms in the hopes that within ten years one or two of them turn into profitable businesses. It only makes big money when those stars are sold or taken public. If the company had emphasized that it operates like a venture fund, some of the current disillusionment among investors might have been avoided.
Secondly, Rocket needs to do a better job of explaining how it values its investments. Shareholders are clearly skeptical of the valuations the company ascribes to its assets: based on its November valuation of 6.06 billion euros ($6.8 billion), the company trades at a 35 percent discount to its portfolio.
The company has 140 fully consolidated subsidiaries, 330 others, and dozens of legal entities to account for, according to its 2014 annual report. It discloses sales and other metrics for only 13 of its companies, those it dubs "proven winners." The biggest of them are Global Fashion Group, a largely Russian and Latin American e-commerce company, and Delivery Hero, which brings food to your door.
Rocket devises a "last portfolio value" a few times a year for each of its companies based on what outside investors pay to buy a stake in those businesses. More transparency around that process would help persuade investors of those valuations....MORE
Florida Man Begins Patiently Waiting for Gawker’s Money to Arrive pic.twitter.com/Q27lFWZ5t6— Florida Man (@_FloridaMan) March 21, 2016
A security officer at a nuclear site was killed in the Belgian city of Charleroi two days after the terror attacks in Brussels, local newspaper Derniere Heure reported, citing police sources. The paper added that the man’s security pass was stolen.
Charleroi is located 50 km from the Belgian capital.
A security guard, who was walking his dog, was shot dead in the early evening on Thursday, the paper said.
His security pass was stolen, which alerted the investigators since the man was a member of a nuclear power plant staff.
Earlier Thursday, DH reported that Brussels suicide bombers Khalid and Ibrahim El Bakraoui were planning attacks on Belgian nuclear power stations and that the arrest of Paris attacker Salah Abdeslam had accelerated the plans of the terrorists.
The brothers reportedly planted a hidden camera in front of the home of the director of the Belgian nuclear research program. The footage with “dozens of hours” of the movements of Belgium's nuclear boss was seized during an anti-terrorist raid in the apartment of another suspect belonging to the same terror cell, Mohammed Bakkali....MORE
Few prominent investors have performed as badly in recent years as Bill Ackman of Pershing Square Capital Management. Battered by the collapse of Valeant Pharmaceuticals International and other stock losses, Ackman’s publicly traded, overseas-listed closed-end fund, Pershing Square Holdings, fetched $14 a share late last week, down from an August 2015 peak of nearly $30. The fund’s net asset value was down 25.2% this year through March 22, after a loss of 20.5% in 2015. The Standard & Poor’s 500 index was about flat last year.While many investors want nothing to do with the controversial Ackman, intrepid buyers could score with shares of the $3.8 billion fund, which trades in Amsterdam (ticker: PSH.Netherlands) and on the Pink Sheets (PSHZF). The fund offers the best way for retail investors to play a possible rebound in Ackman’s fortunes, via a concentrated portfolio of stocks that includes Air Products & Chemicals (APD), Zoetis (ZTS), Canadian Pacific Railway (CP), Restaurant Brands International (QSR), and Valeant (VRX).The fund trades at an 11% discount to its NAV of $15.69 a share as of March 22, and is well below its October 2014 offering price of $25. It has investments and performance similar to Ackman’s main hedge fund, Pershing Square.Pershing Square Holdings and activist investor Dan Loeb’s Third Point Offshore Investors (TPOU.UK), a closed-end fund listed in London, offer retail investors access to hedge fund strategies with some key advantages over regular hedge funds. These include daily liquidity, no minimum investment, and a discount to NAV.In the U.S., individual investors often need to be “qualified”—that is, have substantial income and liquid net worth—in order to buy hedge funds. The Ackman and Loeb funds, in contrast, can be purchased through many brokerage firms, including Merrill Lynch and Fidelity, without restrictions. Charles Schwab allows purchases with some restrictions, but Morgan Stanley allows only qualified investors with a net worth of $25 million or more to buy the two funds, as they aren’t registered in the U.S.Third Point Offshore also trades lightly on the Pink Sheets (TPNTF). It traded around $13.25 last week, a 16% discount to its Feb. 29 NAV of $15.81. The NAV probably has risen since, as the S&P 500 is up 5% so far in March. The fund invests directly in Loeb’s main Third Point hedge fund.In the case of Pershing Square, investors also benefit from an elevated “high-water mark.” Since Pershing Square Holdings is way below its peak level, the NAV would have to rise about 70% for Ackman to start earning his incentive fee. “This offers investors a substantial performance-fee-free recovery,” wrote Jefferies analyst Matthew Hose earlier this month. He has a Hold rating on the fund.Pershing Square Holdings charges an annual base fee of 1.5% and a performance fee of up to 16%. Third Point Offshore has an annual base fee of 2% and a 20% incentive fee, the same as Loeb’s hedge fund.
And as to Greenlight Re and Third Point Re, based on our overall view of the re/insurance biz and depending on what specific hazards they have insured, they might be shorts.While the rewards could be substantial, there are plenty of risks associated with Pershing Square Holdings, stemming from its concentrated positions, use of leverage, and Ackman’s investment style, which included an outspoken defense of Valeant, even as the drug company’s sales practices came under fire.The fund sold $1 billion of debt last year to leverage its holdings, and Standard & Poor’s recently threatened to downgrade the bonds’ triple-B credit rating because of declining asset coverage. That prompted Ackman to raise $835 million for the fund by selling 20 million shares of Mondelez International (MDLZ), the packaged-foods company.It remains to be seen how well Ackman can hold together his organization, given the poor performance and bad publicity. He couldn’t be reached for comment, but in his annual shareholder letter, released on Thursday, he wrote that, at the current discount to NAV, Pershing Square Holdings investors are “paying almost nothing for our investment in Valeant” and that the fund’s overall portfolio is “at a substantial discount to the intrinsic value of the companies we own.”THIRD POINT OFFSHORE INVESTORS might be a better play than Ackman’s overseas vehicle. The $750 million fund could be the only way to get exposure to Loeb’s investing, as his main hedge fund is closed to new investors. When open, the fund’s minimum was a stiff $10 million. Loeb’s firm runs $16 billion....MORE
The Yomiuri Shimbun
A short-form novel “coauthored” by humans and an artificial intelligence (AI) program passed the first screening process for a domestic literary prize, it was announced on Monday. However, the book did not win the final prize.
Two teams submitted novels that were produced using AI. They held a press conference in Tokyo and made the announcement, which follows the recent victory of an AI program over a top Go player from South Korea. These achievements strongly suggest a dramatic improvement in AI capabilities.
The following sentences come from the end of one of the the novels, “Konpyuta ga shosetsu wo kaku hi” (The day a computer writes a novel):HT: GE Reports
“I writhed with joy, which I experienced for the first time, and kept writing with excitement.That novel was submitted for the third Nikkei Hoshi Shinichi Literary Award by a team headed by Hitoshi Matsubara, a professor at Future University Hakodate. Humans decided the parameters for the novel, such as the plot and gender of characters. The AI program then “wrote” the novel by selecting words or sentences prepared by humans and in accordance with the parameters, according to the team.
“The day a computer wrote a novel. The computer, placing priority on the pursuit of its own joy, stopped working for humans.”
At the press conference, science fiction novelist Satoshi Hase said: “I was surprised at the work because it was a well-structured novel. But there are still some problems [to overcome] to win the prize, such as character descriptions.”...MORE
Just last week, an evil, god-like robot defeated Go grandmaster Lee Sedol, a tragic accomplishment that seemed decades away in 2012. In some ways it completed the Triple Crown of robot-fun-killing which began with Garry Kasparov‘s defeat at the hands of DeepBlue in 1997 and continued with the ritual slaughter of Ken Jennings on Jeopardy in 2011.Also at Melville House this month:
And now, the robots are coming for our books. As reported by Japan News, researchers from Japan’s Future University Hakodate have announced that a book co-written by team members and artificial intelligence made it onto the long list of the Nikkei Hoshi Shinichi Literary Award.
The prize itself is somewhat unique. It was established in 2013 to honor Hoshi Shinichi, one of Japan’s most beloved and prolific authors of science fiction. In 2014, Hoshi’s daughter Marina Hoshi Whytemade made the decision to accept literature written by robots and computers. As reported by Alison Flood for the Guardian in 2014:...MORE
One of the economy’s big puzzles is why lower oil prices have done so little to help economic growth. The correlation between oil and stocks is now strongly positive. The opposite should be true since cheaper oil is a tax cut for oil-importing countries like the U.S.
Three economists at the International Monetary Fund have advanced an intriguing theory: lower oil prices drive down actual and expected inflation, which would ordinarily also pull down interest rates. But in most big economies, interest rates are already at or near zero, and can’t go any lower. Thus, as expected inflation falls but nominal interest rates don’t, real interest rates (nominal rates minus inflation) rise, “very possibly stifling any increase in output and employment.”...MORE
Back in October, 2015, Bloomberg’s Tracy Alloway and I struck an OTC futures deal over a teeny, tiny vial of crude oil, which Tracy for some reason felt compelled to nickname “Williston”.
Read about it here.
I now plan to default on this contract (a ladies’ agreement, witnessed by “the world” due its publication on Bloomberg) and this is a public notice explaining my reasons for doing so.
The terms of the contract — henceforth known as the “Williston contract” — were agreed as follows by email:
The contract was structured on Oct 16, 2015 and agreed a price of $49.78 for oil to be delivered in March.
The delivering party pre-agreed to take on the full cost of delivery. (She promised to walk it over to the FT’s office in New York, rather than deliver to Cushing Oklahoma.)
Tracy’s theoretical profit on the contango deal (which this contract was designed to hedge) — bar any basis risk between WTI and North Dakota Light Sweet — was expected to be $2.25 a barrel.
Since the quantity of the oil being dealt was a small fraction of a barrel — about 1 litre — Tracy’s spot acquisition price was deemed 24 cents in October. At $49.78 per barrel, my contract covered a promise to pay approx 31 cents for the oil in question. Her expected profit from a performing hedge was expected to be about 7 cents.
It is now March 24, and WTI oil is trading at approx $38.78 per barrel at the time of writing.
Tracy is in the money on the trade, having wisely hedged her crude in October. I, the counterparty to her hedge, owe her 31 cents in value, in exchange for the delivery of the Williston container to the FT’s office as soon as the transaction is settled. That’s a profit for Tracy no matter what.
Except…
I’m not going to pay her. Instead, I’m going to brazenly default in full view of the world.
My reasons for doing so are both legal and technical.
First, the legalities.
In Tracy’s haste to cut a deal, she made some egregious contracting errors....MORE
Oil prices have been persistently low for well over a year and a half now, but as the April 2016 World Economic Outlook will document, the widely anticipated “shot in the arm” for the global economy has yet to materialize. We argue that, paradoxically, global benefits from low prices will likely appear only after prices have recovered somewhat, and advanced economies have made more progress surmounting the current low interest rate environment.
Since June 2014 oil prices have dropped about 65 percent in U.S. dollar terms (about $70) as growth has progressively slowed across a broad range of countries. Even taking into account the 20 percent dollar appreciation during this period (in nominal effective terms), the decline in oil prices in local currency has been on average over $60. This outcome has puzzled many observers including us at the Fund, who had believed that oil-price declines would be a net plus for the world economy, obviously hurting exporters but delivering more-than-offsetting gains to importers. The key assumption behind that belief is a specific difference in saving behavior between oil importers and oil exporters: consumers in oil importing regions such as Europe have a higher marginal propensity to consume out of income than those in exporters such as Saudi Arabia.
World equity markets have clearly not subscribed to this theory. Over the past six months or more, equity markets have tended to fall when oil prices fall—not what we would expect if lower oil prices help the world economy on balance. Indeed, since August 2015 the simple correlation between equity and oil prices has not only been positive (Chart 1), it has doubled in comparison to an earlier period starting in August 2014 (though not to an unprecedented level).
Past episodes of sharp changes in oil prices have tended to have visible countercyclical effects—for example, slower world growth after big increases. Is this time different? Several factors affect the relation between oil prices and growth, but we will argue that a big difference from previous episodes is that many advanced economies have nominal interest rates at or near zero.
Supply versus demand
One obvious problem in predicting the effects of oil-price movements is that a fall in the world price can result either from an increase in global supply or a decrease in global demand. But in the latter case, we would expect to see exactly the same pattern as in recent quarters—falling prices accompanied by slowing global growth, with lower oil prices cushioning, but likely not reversing, the growth slowdown.
Slowing demand is no doubt part of the story, but the evidence suggests that increased supply is at least as important. More generally, oil supply has been strong owing to record high output from members of the Organization of the Petroleum Exporting Countries (OPEC) including, now, exports from Iran, as well as from some non-OPEC countries. In addition, the U.S. supply of shale oil initially proved surprisingly resilient in the face of lower prices. Chart 2 shows how OPEC output has recently continued to grow as prices have fallen, unlike in some previous cycles.
Moreover, even in the United States, a net oil importer where demand has been fairly strong, cheap oil seems not to have given a substantial fillip to growth. Econometric and other studies suggest that only part of the recent decline in oil is due to slowing demand—somewhere between a half and a third—with the balance accounted for by increasing supply.
So there remains a puzzle: where in the world can the positive effects of lower oil prices be seen?
To address this question, the forthcoming April 2016 World Economic Outlookcompares 2015 domestic demand growth in oil importers and oil exporters to what we expected in April 2015—after the first substantial decline in oil prices. The lion’s share of the downward revision for global demand comes from oil exporters—despite their relatively small share of global GDP (about 12 percent). But domestic demand in oil importers was also no better than we had forecast, despite a fall in oil prices that was bigger than anticipated....MOREHT: The Mess That Greenspan Made
Microsoft's new AI chatbot went off the rails Wednesday, posting a deluge of incredibly racist messages in response to questions.And:
The tech company introduced "Tay" this week — a bot that responds to users' queries and emulates the casual, jokey speech patterns of a stereotypical millennial.
The aim was to "experiment with and conduct research on conversational understanding," with Tay able to learn from "her" conversations and get progressively "smarter."
But Tay proved a smash hit with racists, trolls, and online troublemakers, who persuaded Tay to blithely use racial slurs, defend white-supremacist propaganda, and even outright call for genocide.
Microsoft has now taken Tay offline for "upgrades," and it is deleting some of the worst tweets — though many still remain. It's important to note that Tay's racism is not a product of Microsoft or of Tay itself. Tay is simply a piece of software that is trying to learn how humans talk in a conversation. Tay doesn't even know it exists, or what racism is. The reason it spouted garbage is because racist humans on Twitter quickly spotted a vulnerability — that Tay didn't understand what it was talking about — and exploited it.
Nonetheless, it is hugely embarrassing for the company.
In one highly publicised tweet, which has since been deleted, Tay said: "bush did 9/11 and Hitler would have done a better job than the monkey we have now. donald trump is the only hope we've got." In another, responding to a question, she said, "ricky gervais learned totalitarianism from adolf hitler, the inventor of atheism."...So MUCH MORE
An artificial intelligence (AI) expert has explained what went wrong with Microsoft's new AI chat bot on Wednesday.
Microsoft designed "Tay" to respond to users' queries on Twitter with the casual, jokey speech patterns of a stereotypical millennial. But within hours of launching, the 'teen girl' AI had turned into a Hitler-loving sex robot, forcing Microsoft to embark on a mass-deleting spree.
AI expert Azeem Azhar told Business Insider: "There are a number of precautionary steps they [Microsft] could have taken. It wouldn't have been too hard to create a blacklist of terms; or narrow the scope of replies. They could also have simply manually moderated Tay for the first few days, even if that had meant slower responses."
If Microsoft had thought about these steps when programming Tay, then the AI would have behaved differently when it launched on Twitter, Azhar said.
Azhar, an Oxford graduate behind a number of technology companies and author of theExponential View AI daily newsletter, continued: "Of course, Twitter users were going to tinker with Tay and push it to extremes. That's what users do — any product manager knows that.
"This is an extension of the Boaty McBoatface saga, and runs all the way back to the Hank the Angry Drunken Dwarf write in during Time magazine's Internet vote for Most Beautiful Person. There is nearly a two-decade history of these sort of things being pushed to the limit."...MORE
In the five weeks since February 11, the price of WTI crude oil on the CME/NYMEX spiked 50%, up from $26/bbl to $40/bbl (see black dashed circle in Figure #1). For hedge funds that took long positions in February, it was an awesome trade. And for beleaguered producers, it was certainly a bit of good news. But there are no celebrations in the streets of Houston and Oklahoma City. The fact that $40/bbl should be considered “good news” is sobering: Eighteen months ago, that price level would have been seen as a catastrophe for the producing community. In fact, it still is. In today’s blog we examine the factors that help push prices above $40/bbl and what it will take to really get US production growing again.
Yes, $40/bbl crude oil will help the balance sheets of most oil and gas producers. A handful of rigs might be put back to work. But let’s put things in perspective. Since October 2014, the price of crude is down 60%, over 1,200 rigs drilling for crude (75%) have been idled (see Figure #1), and thousands of oil industry workers are looking for jobs. Producer CAPEX budgets have been slashed, and the reality is that a price of $40/bbl will do little to change the meager investment plans that most producers laid out in their Q1 earnings calls. At $40/bbl, producer returns for drilling most shale wells are under water. Consequently, new drilling has slowed to a crawl. A few companies have declared bankruptcy, and more are on the way.
In the midst of this carnage, the market has started – ever so slowly – to correct itself. Production volumes are declining. Even though the US Energy Information Administration reports that US crude oil production remains above 9 million barrels per day, it is down about 600 thousand barrels per day from its peak this time last year, and will likely drop at least another 750 thousand barrels per day by year end.
The big question, of course, is whether this decline in production, and all the other factors that impact global crude oil supply and demand, have already started to balance the market. Could that explain the 50% spike in crude oil prices over the past five weeks? Is the bottom of the crude oil price crash in the rearview mirror? And are we looking at a meaningful price recovery over the next few months?
Well, it is possible. But it depends on what we consider meaningful. And it also depends on what we deem to be a recovery.
First, let’s consider why prices have spiked up to $40/bbl. While it is possible that supply and demand have moved into balance, it is more likely that technical factors and market psychology have been responsible for much of the increase. There were few fundamental factors pushing the price of oil down to $26/bbl in the first place. Instead, it was the combination of a preponderance of bearish news (Iran production increases post-sanctions, lower demand from a weak Chinese economy, high U.S. oil inventories) accelerated by financial players piling on short trades, driving the market lower. When the news cycle shifted to a glimmer of hope (OPEC/Russia meetings on some kind of production freeze, the promise of higher demand as the U.S. shifts to driving season and summer gasoline blends), the shorts cashed out, and the crude oil price responded accordingly. Whether these factors have solely been responsible for the recent price increases, or whether real changes in the supply/demand balance have also been at work, won’t be known for weeks to come.
But if this is truly the start of an upward trend in crude oil prices, what should we consider meaningful? A price of $40/bbl is not it. At $40/bbl and with today’s drilling and completion costs, there are only a few spots in the major shale plays where it makes economic sense to drill and produce more oil. Those companies smart (or lucky) enough to have potential drilling locations in the sweet spots (locations where the most prolific wells can be drilled) can still drill and still make money. But across all the shale plays in the U.S., there are only about a dozen oil-dominant counties where those economics work. Everywhere else, producer returns for drilling and completing an oil well are in the red.
Thus to be meaningful, the price for crude oil must increase to a level where the economics for a larger number of potential wells are in the black. Furthermore, that price must be confirmed by the forward price of crude (the futures curve) and producers must believe that it will stay at that level for some time and, hopefully, continue to increase. If those conditions are met, it is likely we will see a meaningful response from many producers at a price above $55/bbl. Even though this is far below the $100/bbl price of the shale heydays, many producers can make this number work now because their service providers (drilling crews, frack crews, etc.) have reduced costs by 25-40%, the producers have become much more efficient in their operations, and many more drilling locations are economic at a price level of $55/bbl. Of course, for producers to jump back into the oil patch at that price requires bringing back a lot of workers no longer employed in the industry. And capital must be available to finance the drilling of wells. Determining how these two factors (hiring and finance) will impact the oil patch is a big question for the industry today. Particularly for the hiring issue, the longer prices stay down, the greater the problem becomes.
The other question we need to consider is – what do we deem to be a recovery? Certainly, the producing community would like prices to get back to the good ole days of eighteen months ago - $100/bbl, and then stay at that level for the next few decades. That is pretty unlikely. In fact, what is much more likely is that shale has fundamentally changed the oil market such that the word recovery is no longer relevant to the conversation. That is because oil prices are now range bound, locked into a bracket which is capped at the high end, and with a floor at the low end....MORE
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