The Fracturing Energy Bubble Is the New Housing Crash

Let’s see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super “tax cut”.

In fact, that brutal housing price plunge amounted to a $400 billion per year “savings” at the $1.5 trillion per year run-rate of residential housing turnover. So with all that extra money in their pockets consumers were positioned to spend-up a storm on shoes, shirts and dinners at the Red Lobster.

Except they didn’t.  And, no, it wasn’t because housing is a purported  “capital good” or that transactions are largely “financed” at upwards of 85% leverage ratios. None of those truisms changed consumer incomes or spending power per se.

Instead, what happened was the mortgage credit boom came to a thundering halt as the subprime default rates became visible. This abrupt halt to mortgage credit expansion, in turn, caused the whole chain of artificial economic activity that it had funded to rapidly evaporate.

And it was some kind of debt boom. The graph below is for all types of mortgage credit including commercial mortgages, and appropriately so. After all, the out-of-control strip mall construction during that period, for example, was owing to the unsustainable boom in home construction—especially the opening of “new communities” in the sand states by the publicly traded homebuilders trying to prove to Wall Street they were “growth machines”. Continue reading

How We Got Here

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The answer to every economic problem is one version of statism or another. If monetarism doesn’t succeed in “pump priming” with credit and inflation “stimulus” then surely the fiscal side will with “automatic stabilizers” and indiscriminate government expansion. These two grand economic strategies are often separated as if they are distinct sets of disparate theory; they are not. They represent two sides of the same coin, both being different means to accomplish redistribution as economic catalyst and forward agent.

Nowhere to be seen is a true capitalist solution of creative destruction led by true price discovery in actual free markets. Manipulation is the order of the day, to the point now where Janet Yellen doesn’t even want any markets to consider any negative potential anywhere. In short, she doesn’t want a market to express any kind of opinion except that which she would offer prior approval; to cease being a market altogether.

A lot of this fusion in statist proposals can be traced to the 1980’s and the rise of interest rate targeting as a “rational” means to address rational expectations theory as an excuse of the Great Inflation. As much as psychology may play an economic role, an even larger one was pre-empted by economic theory itself. While the story of the Fed’s lack of independence (“even keel”) is helpful in framing the operational aspects of banking toward the Great Inflation, the role of theory and bias itself should not be overlooked either. Continue reading

We’re Not In Kansas Anymore

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth


Arthur Rothstein “Bank that failed. Kansas” May 1936

Few may have noticed it to date, but it’s not like we still live in the same world, just with lower oil prices. We live in a different world altogether, with the changes between the new and old brought about by the (impending) disappearance of a lot of – virtual – money, or credit, give it a name, and the difference between oil at $110 and oil at $50.

And for the same reason Dorothy feels it necessary to point out to Toto where they find themselves, we have to tell people out there who may think they are indeed still in Kansas that no, they’re not. Or, if we play around with the metaphor a bit, they’re in Kansas, but a tornado has passed through and rendered the entire state unrecognizable.

A big problem is that for most people, Kansas is what the state tourist bureau (re: US media) says it is, all generously waving corn and sunshine, not the bleak reality they actually live in. It’s not easy to figure things out when so much rests on you being and remaining ignorant. Continue reading

Can anybody find me….a central banker to love?

Submitted by Dmitry Orlov  –  The ClubOrlov Blog

[Early morning update: in case you had any doubts, the intervention didn’t work. Ruble and oil are continuing to plunge amid increasing financial market turmoil throughout the world.]

[Last minute update: the repo rate has been just hiked to an eyewatering 17%! At the same time, the percentage of bullshit in the rationale given was lowered significantly: it is to prevent further ruble devaluation. Simply put (perhaps too simply), ruble liquidity for currency speculation has just dried up. At the same time, the central bank is backing long-term investments in industry at a far more reasonable 6.5% rate. Will this be enough to stop the slide?]

On December 11 Russia’s central bank hiked its rate by one percent, from 9.5% to 10.5%. The rationale offered by the bank’s governor Elvira Nabiullina was that this would stop the slide in the value of the ruble. But nobody laughed.

So a more laughable rationale was offered: the rate hike would help contain inflation. Here’s why that’s funny: suppose I am a Russian manufacturer making widgets and now have to borrow at 10.5% instead of 9.5%. I will price my widgets correspondingly higher in order to pay the higher interest. That’s price inflation. Then my workers will start complaining and threatening to defect, and I will have to give them raises; that’s wage inflation. That’s if my widgets are life-saving and people have no choice but to buy them; if my widgets are discretionary and I hike prices, people would simply buy fewer of them, so instead of taking the loan and increasing production I convert my savings into dollars or euros, close up shop and leave the country, telling everyone that I’ve had enough of this Russian central bank nonsense. But what if that’s exactly what the bureaucrats at Russia’s central bank want to see happen? Hmm…

Continue reading

Supply Indeed

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

After months of hearing about how the fracking “miracle” is totally, fully and comprehensively responsible for the drop in oil prices there is finally penetrating reality. After the continued disruption in the Chinese economy as well as the close onset of recession in Europe, plus full-blown recession in Japan and Brazil, all that is left is really the diminutive hope of “decoupling.” Throw in some currency crises and even that falls out of the realm of possibilities as the drawing unease relates to impending global dysfunction without any real place to hide.

And so risk margins are reduced, bank balance sheets adjust and the “dollar” supply for leverage and “growth” finance (mostly waste) shrinks. Sure, oil prices are due to oversupply but only in the context of significantly reduced usage.

Oil fell below $59 a barrel for the first time since May 2009 on Tuesday, extending a six-month selloff as slowing Chinese factory activity and weakening emerging-market currencies added to concerns about demand…

A report showing Chinese industrial activity shrank for the first time in seven months in December added to concern about oil demand. China is the second-largest oil consumer after the United States.

Hopefully as this new reality, falling away from the “narrative” of central banking genius, breaches further it will start to pull the curtain away from the central aspect of reduced growth globally – end market demand is simply not there. The recovery isn’t.

ABOOK Dec 2014 Oil Is Demand Brazil China Continue reading

$1 Trillion In Global CapEx At “Unambiguous” Risk As A Result Of Crude Crash

Submitted by Tyler Durden  –  ZeroHedge

Just like with the Mohammed Islam story, the religious belief by the cheerleading crew that the crashing price of oil is so “unambiguously, unquestionably, undisputably” good for the US is so taken for granted, that nobody actually checked the facts.So here is one such attempt by the FT, which writes that “almost $1 trillion of spending on future oil projects is at risk as a result of the plunge in crude to $60.”

The price plunge has shaken the energy industry, throwing some of the majors’ most ambitious plans into doubt and pummelling oil company shares. Projects in challenging frontier regions like the deep waters of the Gulf of Mexico are predicated on high oil prices and may not be economic with oil at $60 a barrel — the level Brent was trading at on Monday afternoon.

Goldman has examined 400 oil and gasfields around the world, many of which are still awaiting a final investment decision. Its analysis, based on a $70 oil price, shows that fields representing 2.3m b/d of output by 2020 and awaiting a green light have now become uneconomic. That figure rises to 7.5m b/d of production by 2025. The analysis excludes US shale.

The bank shows that companies will need to cut costs by up to 30 per cent — for example by forcing suppliers to take steep price cuts — to make these projects profitable at $70 a barrel.

In total, the production at risk from such fields adds up to $930bn of investment.

Continue reading

Want to Know Who Really Runs the United States? Read On…

Submitted by Bill Bonner – Chairman, Bonner & Partners

Dow down 99 points yesterday. Gold fell $28 an ounce – its fourth straight day of losses.

Stock markets have been slipping all over the world, especially in Europe. But outside of Russia, and maybe Greece, so far there is no sign of real panic. That will come later.

We’re spending this week in Washington, zombie watching.

Yesterday, we spent the evening in the lobby of The Willard hotel. A choir sang carols.

Hark the herald angels sing,
“Glory to the newborn King!”

In one corner a group of cronies sat negotiating a deal; whose ox they were goring we don’t know. Pairs of women sipped their champagne and nibbled their cookies. A few tourists gawked at the splendor of it: a Christmas tree worthy of Yosemite… ceilings rivaling those of the Louvre. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Oil Has Become The New Housing Bubble (CNBC)
Oil’s Crash Is the Canary In the Coal Mine for a $9 Trillion Crisis (Phoenix)
Oil Slides Below $55 as U.S. Output Seen Steady Amid OPEC Fight (Bloomberg)
Brent Seen Falling to $50 in 2015 as OPEC Fails to Act (Bloomberg)
Crash-O-Matic Finance (James Howard Kunstler)
Russia Central Bank Raises Interest Rate To 17% On Ruble Collapse (Guardian)
How China’s Interest-Rate Cut Raised Borrowing Costs (Bloomberg)
China Manufacturing In Contraction (BBC)
Why Paul Krugman Is Wrong (AEP)
You Are Hereby Baffled With Bullshit (Zero Hedge)
Bill Gross: US Structural Growth Rate To Be About 2% Or Less (CNBC)
Did Wall Street Need the Swaps Budget to Hedge Against Oil Plunge? (Yves)
Greek Central Bank Boss Warns Of ‘Irreparable’ Economic Damage (BBC)
German Economy at Risk of Downturn as Growth Seen Weak at Best
Russia Says US, NATO Increased Spy Flights Seven-Fold (Bloomberg)
All I Want for Christmas is a (Real) Government Shutdown (Ron Paul)
Peat Is Amazon’s Carbon Superstore (BBC)
Denmark Claims North Pole Via Greenland Ridge Link (AP)
Welcome To Manus, Australia’s Asylum Seeker Dumping Ground Gulag (Guardian)
Only Five Northern White Rhinos Now Exist On The Entire Planet (MarketWatch)
Is The Lima Deal A Travesty Of Global Climate Justice? (Guardian)
Bad News For Florida: Models Of Greenland Ice Melting Could Be Way Off (NBC)

Continue reading: Debt Rattle December 16 2014 – The Automatic Earth

Interviewed by Thomas Fazi for ONEURO: Greece, the EUROZONE and the prospects of a SYRIZA government

Submitted by Yanis Varoufakis  –  The Yanis Varoufakis Blog

Screen Shot 2014-12-15 at 12.46.43 PMThomas Fazi has just interviewed me for ONEURO on Greece and the Eurozone two months before a possible Greek election. Before the interview is published in Italian, here is the Q&A in its English original…

  • There’s a lot of talk about Greece’s supposed ‘recovery’, a sign of the ‘success’ of austerity. How do you judge this narrative, and how would you describe the real state of the Greek economy? (It would be great if you could mention what you said in Florence, about Greece’s ‘GDP growth’ being non-existent when deflation is taken into consideration)

Greece is and remains in a Great Depression. Seven years of precipitous falls in income, coupled with negative investment, have spawned a humanitarian crisis. In each of these years, the European Commission, the European Central Bank and the International Monetary Fund predicted that recovery was “around the corner”. It was not! Now, on the basis of one quarter of positive real GDP growth, they are celebrating the recession’s ‘end’. But if we look carefully at the numbers, it turns out that, even according to official figures, the recession is continuing. Consider this: real GDP rose by 0.7% at a time that prices, on average, fell by 1.9%. I remind our readers that real GDP equals GDP measured in euros divided by an index of average prices. Given that this index wentdown by 1.9%, and that the whole ratio (real GDP) only rose by 0.7%, this means that GDP as measured in euros declined! So, the rise in real GDP happened because national income, in euros, went up. It rose because total income, in euros, fell more slowly than prices did. Preposterously, the powers-that-be expect the Greek people to celebrate this as the ‘End of Recession’. They won’t! Continue reading

No ‘Dollar’ Resolution

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

The growing sense of an economic cliff is based on three major factors, all of them in massive markets as opposed to manipulated and ill-suited statistics. The most obvious are oil prices and the UST curve (and related curve mechanics) as they have turned to prices and shapes not seen since the worst of the last crisis. The third, “dollar” balance sheet “supply”, is related to that but far harder to define.

The outward appearance of dysfunction and crisis is often as a discrete event. The UST irregularities on October 15 are a perfect example, as in almost all commentary it is being treated in isolation. That is a highly dangerous mistake and it was a good start that the Office of Financial Research, an agency in the Treasury Department, was quick with a warning about making such an easy mistake. What took place on October 15 was part of a trend stretching back months, but also, more importantly, that is not yet finished.

Crises are ebbs and flows, with these obvious breakouts only showing the “tip of the iceberg.” Underneath this latest illiquidity event, repo markets had been warning of incapacity going all the way back to June (and I am convinced the ECB’s negative deposit rate was the catalyst of all of this).

ABOOK Dec 2014 Intl Dollar Repo Fails

Continue reading

Crash-O-Matic Finance

Submitted by James Howard Kunstler  –  www.kunstler.com

Oil prices have dropped $50 a barrel. That may not sound like much. But when you take $107 and you take $57, that’s almost a 47 percent decline…!”
–James Puplava, The Financial Sense News Network

May not sound like much? I guess when you hunker down in the lab with the old slide rule and do the math, wow! Those numbers really pop!

This, of course, is the representative thinking out there. But then, these are the very same people who have carried pompoms and megaphones for “the shale revolution” the past couple of years. Being finance professionals they apparently failed to notice the financial side of the business, for instance the fact that so much of the day-to-day shale operation was being run on junk bond financing.

It all seemed to work so well in the eerie matrix of zero interest rate policy (ZIRP) where investors desperate for “yield” — i.e. some return more-than-zilch on their money — ended up in the bond market’s junkyard. These investors, by the way, were the big institutional ones, the pension funds, the insurance companies, the mixed bond smorgasbord funds. They were getting killed on ZIRP. In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10 percent and do what they had do — write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries. Continue reading

PIGMEN WIN AGAIN

Submitted by Jim Quinn  –  The Burning Platform

“The real owners are the big wealthy business interests that control things and make all the important decisions. Forget the politicians, they’re an irrelevancy. The politicians are put there to give you the idea that you have freedom of choice. You don’t. You have no choice. You have owners. They own you. They own everything. They own all the important land. They own and control the corporations. They’ve long since bought and paid for the Senate, the Congress, the statehouses, the city halls. They’ve got the judges in their back pockets. And they own all the big media companies, so that they control just about all of the news and information you hear. They’ve got you by the balls. They spend billions of dollars every year lobbying ­ lobbying to get what they want. Well, we know what they want; they want more for themselves and less for everybody else.”  George Carlin

After the disgusting example of politicians of both spineless parties bowing down before Wall Street, the military industrial complex and corporate interests this weekend with the passage of a bloated pig of a spending bill totaling $1.1 trillion, how can anyone not on the payroll of the vested interests not admit there is only one party – and it serves only the needs of the wealthy business interests. Obama, champion of the common folk, signed this putrid example of political corruption and corporate capture of the American political system. For all the believers who voted for the red team in the November mid-terms, this is what you got – a bipartisanship screwing of the American people. Continue reading