Mr. Trump Goes to Davos

The idea of Donald Trump attending the World Economic Forum in Davos, Switzerland, is a bit like mixing oil and water.

Like many on the Davos guest list, the U.S. president is both a prominent world leader and billionaire businessman. Unlike most of them, he also champions nationalism and economic protectionism, views that rarely receive a platform at the world’s largest annual celebration of globalization and the global elite who love it.

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Looking For Interest In Smaller Places

Interest rates on certificates of deposit at small banks, internet banks and credit unions are now a full 1 to 1.5 percentage points higher than at big banks. While all financial institutions have raised the lending rates they charge their borrowers in response to Federal Reserve rate hikes, only the smalls have been raising deposit rates.

Previously, most financial institutions were reluctant to raise deposit rates because their profit margins had been so squeezed by the ultralow rates that prevailed before the Fed finally started hiking at the end of 2016. But now, competitive pressures to attract deposits are forcing small banks, internet banks and credit unions to raise their full range of CD deposit rates in line with the increase in Treasury bill rates (though offerings on lowly savings accounts are still paltry). Continue reading “Looking For Interest In Smaller Places”

What’s Fueling Oil’s Big Rally?

If you follow the energy markets at all, you already know that crude oil is enjoying an epic price rally. In mid-July of last year, benchmark West Texas Intermediate crude was trading at $45 per barrel. Six months later, WTI has zoomed to $64 per barrel: A heady 40% advance, which makes the stock market look positively pedestrian by comparison.

So, what gives? And more importantly, can the rally continue?

A host of factors have collided to push oil prices higher. For starters, OPEC is delivering on its promise to pump less crude and tighten the global market. Data from S&P Global Platts shows that, in December, the oil cartel actually pumped below its quota. That’s mostly attributable to a steep production decline in Venezuela, which is in the grips of a full-blown economic crisis.

There’s also the weaker U.S. dollar. Because most oil contracts are denominated in dollars, it takes more of them to buy a barrel of oil when the buck loses value relative to other currencies.

And perhaps most importantly, economic growth is picking up both in the U.S. and around the world, which points to higher oil demand ahead.

Whether prices can keep climbing will hinge largely on whether stockpiles of crude keep falling because of heavy demand and restrained OPEC production.

After setting an all-time high last March, America’s stored crude oil supplies have dwindled. That trend is accelerating, and at a time when refineries normally slow down for winter maintenance. That hasn’t happened this season, says S&P Global Platts Oil Futures Editor Geoffrey Craig. Instead, refineries have been running at full-tilt to churn out gasoline and other fuels. Why? Because of heavy demand for heating oil amid the recent polar vortex that locked much of the country in bitter cold for weeks on end, he says. Assuming the weather moderates, Craig expects refineries to stop buying up so much crude, which should allow stockpiles to rebound. The question is: How sharp will the turn-around be?

If refiners slam on the brakes and crude starts building up in storage at a fast clip, look for oil prices to retreat. Conversely, a return of severe cold will keep them running overtime, which would further drain stockpiles and probably push prices even higher.

Meanwhile, keep a close eye on U.S. oil production. Weekly data from the Energy Department have shown small but steady increases in domestic production, and the government is projecting that production will rise to a new all-time record in 2018, eclipsing the mark of about 10 million barrels per day set in 1970. (The latest DOE data peg current production at 9.75 million barrels/day.)

Will U.S. energy firms open the oil taps further in 2018? So far, the rally in oil prices hasn’t spurred additional drilling, at least according to the widely followed “Rig Count” survey published by Baker Hughes. Back in early July, when West Texas Intermediate crude was trading for $45 per barrel, there were 763 rigs drilling for oil in the U.S. Today, with WTI at $64 per barrel, there are only 747 rigs running. That supports claims from several energy companies that they are cutting their capital budgets to focus on turning a profit instead of spending heavily to goose production. Investors in the sector have applauded that cautious tack.

But if oil prices continue climbing, look for some companies to throw caution to the wind and “drill baby, drill!” That would unleash an even bigger supply increase than the DOE is expecting and weigh on prices. As a side note: S&P Global Platts’ Craig observes that energy companies are already rushing to lock in current prices via oil futures contracts. That might signal significant amounts of new crude coming to market fairly soon.

So, don’t bet too much on the oil rally just yet. High prices have a funny way of curing high prices. I look for WTI to pull back modestly this spring as refineries slow down their crude buys and American shale producers ramp up output. Of course, some sort of geopolitical shock, such as the shutdown of oil production in crisis-ravaged Venezuela, could always send the market soaring again. Or another cold spell could spur heavy demand for heating oil. But absent that sort of extraordinary event, the market looks due for a breather.

Control of Congress Rests on Handful of Critical Variables

It’s too early to make a definitive call on the midterm elections, but here are some key factors shaping the campaign landscape.

The Generic Congressional Ballot: This poll asks people which party they would support in a congressional election, without mentioning any specific candidate. So far, Democrats have a clear advantage. RealClearPolitics, a political polling and news aggregator, shows the party with an average lead of 9 points on the generic ballot, based on polling data dating back to January 2017.

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Tech Companies are Racing to Fix a Chip Bug, But Threats Will Linger

A major computer chip security flaw will continue to roil the tech industry for years to come. The problem affects a staggering amount of modern information technology around the globe, including PCs, smartphones and servers that run widely used cloud computing apps. The issue stems from processors from Intel, AMD and ARM, which are at risk of exposing sensitive data to hackers, such as passwords and encryption keys.

The vulnerabilities were discovered in June by security researchers at Google, who quickly reported it to the chipmakers and other hardware and software companies, prompting a rapid behind-the-scenes company response. The problem was made public on January 3 by the tech website The Register, causing tech firms, particularly Intel, to scramble to disclose more information. Continue reading “Tech Companies are Racing to Fix a Chip Bug, But Threats Will Linger”

North Korea’s Nuclear Drive will Upend Detente

2017 was a groundbreaking year for North Korea’s nuclear program. This year will bring more provocations intended to challenge the United States and bolster Pyongyang’s claim of being a full-fledged nuclear power.

Harry Kazianis, director of defense studies at the Center for National Interest, already dubbed 2018 “the year of the North Korean missile.” But North Korea’s next move is on hold while it engages in talks with South Korea to ease tensions ahead of the 2018 Winter Olympics, which open in Pyeongchang, South Korea next month. Seoul and Washington suspended annual joint military exercises until after the Olympics as a sign of good faith.

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Iranian Protests Unlikely to Topple Anti-American Regime

Forecasting political developments in the Middle East is a fool’s errand—doubly so when the country is Iran.

On New Year’s Eve 1977, President Carter famously called it “an island of stability in one of the more troubled areas of the world,” only to watch revolutionary students hijack the U.S. embassy in Tehran a year later, holding 52 Americans hostage for 444 days and crippling his presidency.

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Trump Sets China in his 2018 Sights

Sino-American relations will take a turn for the worse in 2018, as the Trump administration makes good on its trade threats and North Korea undermines President Trump’s positive relationship with his Chinese counterpart, Xi Jinping.

Despite his long-held skepticism about China’s trade practices, Trump spent his first year in office trying to woo Xi—Beijing’s most powerful leader in decades—in hopes of convincing him to take a harder line on Pyongyang’s nuclear provocations.

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