Author: Lior Alkalay

Time For The Fed To Take It Easy

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


The Fed’s June rate decision is coming up this week and the consensus bets are overwhelmingly tilting towards a rate hike. According to the CBOE Fed Funds rate probability chart, the probability the Fed will raise rates at the next meeting is 91.3%. Thus, suggesting that market participants are almost certain a rate hike is coming. Furthermore, there is also growing consensus that the Fed will also start trimming its balance sheet as early September. However, a deep dive into the mechanics of the US economy suggests that the Fed should ignore the consensus, and even its own outlook, and take a step back from tightening. And it all starts with the puzzling discrepancy between inflation and housing prices.

Home Prices Heat as Inflation Cools

Upon the surface, the latest fall in the US Core inflation rate, from 2.3%, four months ago to 1.9%, and the latest surge in US housing prices (as reflected by the Case-Shiller Index) present a somewhat puzzling divergence between the US inflation outlook and housing prices. Nonetheless, those two contradicting developments are closely intertwined, both to each other and to the Fed’s monetary policy. And, to illustrate the link between the two, we must dive into the US Treasury market. Continue reading "Time For The Fed To Take It Easy" →

Oil: Is It 2014 All Over Again?

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


In the past two weeks, crude oil futures took a beating; WTI futures ended last week at $46.47 per barrel while futures for Brent crude, the global benchmark, closed at $49.47 per barrel. Both WTI and Brent contracts have now concluded a 15% and 16% fall from their respective peak prices, closing at their lowest point since the deal between OPEC oil producers and 13 non-OPEC oil producers was signed. And the outlook for oil is not encouraging as a broader analysis of both the fundamentals and technical at play reveal a worrisome pattern—a pattern of an oversupplied oil market, ready to nose dive, as it did in 2014.

At the heart of the matter, as in 2014, is the US shale oil industry. Only this time around the US shale industry is significantly more competitive. According to Ron Ness, president of the North Dakota Petroleum Council quoted by Reuters, “the cost of extracting oil at Dunn County, North Dakota, is as low as in Iran” and “the cost of producing a barrel of oil is at $15 and falling" That figure is truly nothing short of dramatic! True, the production cost at Eagle Ford and Permian Delaware facilities is higher than Dunn country. And yet this figure underpins a very important change. In the next oil slump, shale producers won't be under the same pressure to cut production. Meanwhile, oil production in America has risen to 9.29 million barrels a day and is expected to surge to 10 million barrels a day by 2018. All the while, crude oil inventories are stubbornly high. The latest data from the EIA shows crude oil inventories were at 527.8 million barrels, at the higher end of the 5-year range. In fact, as the EIA chart below shows, US crude oil inventories have been persistently above the 5-year range for some time, suggesting demand for crude in the United States is too weak to accommodate the rising supply from shale oil. Continue reading "Oil: Is It 2014 All Over Again?" →

Why Is The Federal Reserve Not Selling?

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


On March 15th, the Federal Reserve Chairman, Janet Yellen, announced that the Fed would raise its target rate to 0.75-1.00% from 0.5-0.75%. Yellen also stressed, in a clear, hawkish tone, that the United States economy is doing well. After roughly three months of “hints” embedded in the Fed’s many statements, that news was hardly a surprise.

But in the same speech, Yellen stressed that the Fed was not ready to start selling the $4.5 trillion in the Treasury Notes, Treasury Bonds and mortgage papers that it holds on its balance sheet. Instead, Yellen stressed that the Fed sees rate hikes as the monetary tool. Further, rate hikes, as a tightening measure, must first be exhausted before the Fed would start selling those trillions. That was a clear retreat from the hints the Fed had dropped in the weeks which followed President Trump’s inauguration.

In fact, one could go so far as to say Yellen’s rhetoric, with respect to the Fed’s balance sheet, has been dovish; the way Yellen specifically emphasized how cautious the Fed is about the prospect of trimming its balance sheet singled that option out as some kind of a “bomb” that the Fed doesn't really want to drop and which could send markets into panic mode. If, indeed, the US economy doing so well, why then is the Fed not ready to roll back Quantitative Easing, a stimulus measure generally considered life support for the banking system? Continue reading "Why Is The Federal Reserve Not Selling?" →

Bitcoin Is NOT The New Gold

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


Last week, the price of one Bitcoin surged above $1,227, the price of an ounce of Gold. And the headlines soon followed, screaming, “Bitcoin worth more than Gold.” The implication, of course, that Bitcoin is the new Gold in the world. In reality, however, Bitcoin is hardly the “new” Gold, real or digital.

In arguing for Bitcoin’s allure, enthusiasts tend to fall back on one singular point; like real Gold, there is but a finite number of Bitcoin that could be mined (21 million to be exact). But that is hardly the case. Bitcoin’s allure is not a factor of its rarity, but rather its ecosystem. That ecosystem enables financial transactions between two parties, both anonymously, and at very low costs. The fact is that that ecosystem could be easily replicated with an alternative to Bitcoin. So, while the number of Bitcoins we can mine is limited, the amount of alternative ecosystems that could emerge for Bitcoin wannabes is not. In fact, even today, there are already 12 different alternatives to Bitcoin, including Litecoin, Peercoin and Primecoin.

However, there is one area in which Gold and Bitcoin have something in common and, unfortunately, for Bitcoin bulls, it is in their vulnerability rather than strength. Both Bitcoin and Gold do not pay interest like a currency, nor a dividend like a stock. And when interest rates rise the allure of Bitcoin and Gold quickly fades. Because, simply put, there are better alternatives. Continue reading "Bitcoin Is NOT The New Gold" →

German Bundesbank Uneasy With ECB

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


Relations between the German Bundesbank and the ECB are turning tense again. What dictates this complex relationship of ups and down is one thing and one thing only—the Bundesbank’s fear of inflation. When deflationary pressures occur (falling prices) the German Bundesbank tends to accord more leeway for the ECB and it mutes its hawkish stance.

But when German inflation is on the rise, then the trauma Germany experienced from the inflationary crisis of the 1930s comes rushing back. Then the Bundesbank’s stance becomes hawkishly vocal and relations become strained. So, what has caused Germany’s Bundesbank to “raise its voice” this time around? This time, it's a bit more complex than just inflation. Continue reading "German Bundesbank Uneasy With ECB" →