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As demonstrated in Paris in 1895, what matters is not whether the train wreck was on time. What matters is that it’s a wreck. (Wikipedia Photo)
The dominoes are toppling, just as we have been expecting for nearly a year now, but slower than we thought. The fact-resistant strain of humans (Thank you, Borowitz Report) now in charge of the world are trying to use vast amounts of money to counteract gravity, and, counterintuitively, succeeded in slowing the dominoes’ fall. But not for long.
To review our expectations of last summer: the hideous decline rate of fracking wells (of up to 90% in three years) was forcing frackers to borrow huge amounts of money to put up large numbers of new wells at a breakneck pace in order to preserve the illusion (it was always an illusion) of a revolution in American oil leading to prosperity and “energy independence.” On average, it cost the frackers over $4 to get $1 of revenue in the door during the first quarter of this year. A year ago, with oil commanding $100 a barrel, they were still spending $2. As the old joke goes, the only way to make any money when you’re losing on every transaction is to make up for it with volume. But since most of the money spent was capital expenditure — i.e. new wells — their operating statements showed profits and nobody looked at the balance sheets.
We ran this scenario on our abacus and concluded that these guys were going to go broke. And that when they did, not only would U.S. oil production resume its long slide toward zero, begun in 1970, but they would blow up the junk-bond market, almost certainly the bond market, and probably the stock market. These expectations were in place before the price of oil tanked last fall, and set the expectations in concrete.
Now, let’s review the state of play:
Are they broke? Pretty much. As Bloomberg reports (“The Shale Industry Could be Swallowed by its Own Debt”), S&P has so far this year lowered the outlook or downgraded the credit of almost half the exploration and production companies it rates. Amazingly, despite the awful numbers, lenders have continued to pour money into the zombie companies (See “Oil Money: Too Dumb to Fail”) as they struggle to keep pumping so they can turn over their debt so they can keep pumping. Remember the old advice — when you find yourself in a hole, stop drilling? They don’t.
Has the junk-bond market fallen apart yet? Looks like it. “Investors” experiencing sudden attacks of vertigo pulled $5.5 billion out of the junk bond market in the two weeks ending June 17, and $3.6 billion so far this year out of the funds based on high-risk “leveraged” loans.
Is the regular bond market in danger? Oh, yeah. According to Bank of America Merrill Lynch, last week “High grade credit funds suffered their biggest outflow this year, and double the previous week.” Some of this was no doubt related to the hair-on-fire volatility of the European and Asian bond markets during the last month or so, but not all of it.
Is oil fracking production declining? Yes, indeed. According to the U.S. Energy Information Administration, fracking output declined last month, by more this month, and will continue falling off at least through the end of the year. (It’s really a forever thing, but they can’t bring themselves to say it.) [See “It’s Official: The Shale-Oil Boom is Over”]. Worldwide, 150,000 jobs in oil and gas production have vaporized, with the U.S. having the “fastest and steepest decline.”
Is the stock market in trouble? Deeply. On Thursday, the Nasdaq tech-stock index reached its highest number in history, but only the uninformed, the inexperienced and the truly, deviously evil are celebrating it. It’s like having a party because grandma, at 99, just recorded her highest temperature ever. Stocks are hideously over-valued, highly leveraged, and insanely volatile — all sure signs of impending crash. Every day now, you can find some Master of the Universe talking of the need to have at hand a bag of “physical cash” in preparation for what they are referring to as a “systemic event.”
How much more clearly, and with how much more authority, could we possibly be told to brace for impact?
With you all the way, Mr. Lewis. i divested my meager holdings in stocks to cash and i’m about to pull that out and hold it “in house” until we see how things “shake out.”
By now you know i’m firmly in the “extinction” camp (by 2030, imho), but the crash and collapse of industrial civilization will be long and ugly, regressing in fits and starts, until finally the grid goes down and the nuclear power plants start going Fukushima, rendering everything else moot. We’ll witness the chaos, desperation, violence and death associated with human predicaments – especially as food and water become scarce. You can’t eat money or gold, so all “preparation” is meaningless, ultimately.
The richest have the most to lose, and they will lose it all. Maybe that will awaken them to the folly of their ways. Probably not.
Tom,
I with you and Tom all the way as well. All the indicators are there if you really understand how to read those numbers.
Yet the delusion of those with their IRA Roths and 401Ks is still high; they are arrogant and pretentious. You can’t talk sensibly or rationally to them. They see those market numbers so high and they are coming in their pants, drooling like rabid dogs at the thought of retiring to Florida (South Beach no less) and taking those endless vacations around the world. The future looks bright, brighter than bright. Mention a man named Ponzi and watch the blank look you’ll get.
Don’t dare to mention to any of these people that you dig in the dirt (while you have water or are allowed to capture rain water) grow your own food (how white trash can you get) and dare to can the excess to last throughout the winter (there will always be food on the shelves in this Just In Time system). After a few minutes of your babbling their bodies tense, their eyes glaze over and they’ll get up and vacate those warm wooden seats in the sauna as fast as Pepe Le Pew. Your are a downer man, a real doomer. Happens every single time.
Mentioned to a couple of people today that the word evacuation was being bandied in a few places regarding the folks in California. Where do we transplant any portion of over 40 million people? Well that’s an awful lot of Soylent Green (won’t those celebrities taste real good). Those Californians just couldn’t conceive they’d ever have to leave the land of oranges (which probably come from China) and sunshine and return to the land of snow and ice. Our memories are so, so short to have completely blocked out the work of one John Steinbeck and his great American novel, “The Grapes of Wrath” as the Joads made the trek from the Oakies to the West and now their descendents will just have to make the return journey home. Hope they make it back before the Ogalla dries out.
Don’t ask how this mornings conversation went with the guy I buy fish from in Forest Hills, Queens. He apologized about the size of the scallops being so small today. I let him know that almost the entire west coast of the country from Alaska to California was suffering from dead zones and species collapse of sardines and baby salmon seem to have a virus of some kind. He laughed at me in that nervous way that said he thought I was pulling his chain and didn’t believe me that it was really happening; right now, this minute.
I really think I know how Kurt Gerstein felt as he persistently attempted for years to get someone, anyone (Pope Pius XII in particular) to listen to him about the extermination of the Jews. Then in the end after the camps were “found” (when were they ever really lost) they wanted to know why he didn’t do more to get the message out. It’s as tragic as the four innocent French soldiers were murdered by the upper echelon of French Military to set an example to the other soldiers during World War I. “Paths of Glory” featuring Kurt Douglas.
Or the plight of those miners in New Mexico which was the plot of “Salt of the Earth”; the only film that was ever blacklisted in the USA. The lead actress, Rosaura Revueltas, was blacklisted and deported.
And so the wheel goes round and round and we kid ourselves that things are getting better and better because those economist have gotten us to believe it’s better to have an iPhone because it makes life so much better than not having one.
Agree with you 100%.
(BTW it’s Kirk, not Kurt)
I love panic, or even the plan for panic. It creates real opportunity for sensible people. Companies that IPO with just a dream of profit someday. We got them., ex Fitbit, many others. Profits likely won;t happen, ever. Same as it ever was. But oddly enough there are solid companies, with little debt, not much requirement for capex, generating real cash profits and paying real dividends. Many are trading within 5% of their 52 week lows and are real bargains. This the paradox. There are always bargains somewhere no matter how overvalued “the market” is. Look where no one else is looking.
Bet you can’t wait for WWIII
WWIII is being fought right now. It is a economic and cyber war with a little bit of shooting. It will be WWIV that is the deal breaker.
I can’t prove it but many financial “services” are dropping their fees to (it appears) dump the items they make a market in. Be very careful!
Arnie
Sore losers who have missed a great bull market. Sour grapes all the way!
Check out the latest GDP Figures. (H/T Zero Hedge)’
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/06/20150624_Nailed%20it.jpg
RE
Read this latest installment of a familiar theme, and found myself wondering about the effect of Greece’s decisions on this interlocking ball of unpayable global debt. And whether Tsipras tugging on the Greek string might unravel the entire sweater… Perhaps you’ve seen this- The Butterflies Wings Effect. Chaos Theory.
http://northmantrader.com/2015/06/27/the-greek-butterfly-effect/
Author says, “Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize.
“When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle: Make the math workable.”