Peter Schiff Warns: “The Whole Economy Has Imploded… Collapse Is Coming”

Peter Schiff Warns: “The Whole Economy Has Imploded… Collapse Is Coming”

peter-schiff-warns

Back before 2008 Peter Schiff was harshly criticized and laughed at for his predictions about a coming economic collapse. Among other things Schiff warned that consumer spending had hit a wall, stocks were overpriced and lax credit lending practices would lead to a detonation of the banking system. Rather than heed the warnings, the biggest names in mainstream media tried to discredit him for not toeing the official narrative. Shortly thereafter, of course, Schiff was vindicated and much of the doom he had forecast came to pass.

Pyramid of Capitalism

Pyramid of Capitalism

Today, Schiff continues to argue that the economy is on a downhill trajectory and this time there’ll be no stopping it. All of the emergency measures implemented by the government following the Crash of 2008 were merely temporary stop-gaps. The light at the end of the tunnel being touted by officials as recovery, Schiff has famously said, is actually an oncoming train. And if the forecast he laid out in his latest interview is as accurate as those he shared in 2007, then the the train is about to derail.

We’re broke. We’re basically living off of debt. We’ve had a huge transformation of the American economy. Look at all the Americans now on food stamps, on disability, on unemployment.

The whole economy has imploded… the bottom hasn’t dropped out yet because we’re able to go deeper into debt. But the collapse is coming.

Fundamentally, America is worse off now than it was pre-crash. With the national debt rising unabated and money being printed out of thin air without reprieve, it is only a matter of time.

Schiff notes that while government statistics claim Americans are saving again and consumers seem to be spending, the average Joe Sixpack actually has a negative net worth. But most people don’t even realize what’s happening:

I read a statistic… The average American has less than a $5000 net worth… it’s pathetic… we’re basically broke… but in fact it’s much less… If you actually took the national debt and broke it down per capita, the average American has a negative net worth because the government has borrowed in his name more than the average American is able to save.

What’s happening is pretty much what we would anticipate. I don’t see from the data any real economic recovery, certainly not in the United States.

We’re spending more money, but it’s not because we’re generating more wealth. We’re generating more debt. We’re using that borrowed money to consume and so temporarily it feels that we’re wealthier because we get to spend all that money… but we have to come to terms with paying the bill.

The bills are going to come due. Right now interest rates are being kept at zero which makes it possible to service the debt even though it’s impossible to repay it… at least we can service it. But once interest rates go up then we can’t even service it let alone repay it. 

And then the party is going to come to an end.

The problem, of course, is that no one with any real influence over public perception, like our elected officials or the media, will do anything about it. They’ll continue the party until it comes to an abrupt and irreversible end, and anyone who goes against the official narrative will be branded a lunatic gloom and doomer or extremist.

But vilifying those who are blaring the warning sirens will do nothing to change the end result:

We’re going to have a crisis… There are always going to be people who say ‘well, you’re a stopped clocked… you keep predicting doom and eventually it happens’… but you have to back and listen to why… Why are they saying it?

If you look back at things that I’ve said and the things that Ron Paul has said… This is why it’s happening… it’s not like we’re just saying negative things to be negative and then when something negative happens we can claim credit for it happening.

If you look back at the events it bears out that we’re right… unfortunately our opinions are in the minority… and you have governments that have a vested interest in ignoring these opinions because they don’t want to change because they’re at the root cause of the problem. But they don’t want to acknowledge their role in creating the problem.      They don’t want to acknowledge that the problem is more government and that we need less government because that’s not how they stay in power. They promise something for nothing… they promise that government is the solution for your problems, not the cause of your problems. 

They’re never going to acknowledge people like Ron Paul for what they’re saying… but they’ll try to discredit you by saying ‘well, you’ve been saying this for years and nothing bad has happened.’

But look around. A lot of bad stuff has happened. We just haven’t had the final and complete collapse. But what good is it when that happens? Now it’s too late to do anything about it.

The reality is that the American economy is on its last leg. Black Friday sales were pitiful, some of the world’s leading companies are warning of recession, and U.S. national debt will soon surpass $20 Trillion.

Just as was the case before the Crash of 2008, all of the signs are there. And just like before, the stock market continues to hover near all-time highs.

If you’ve been paying attention you know what happens next.

 

Plunging Into Difficult Economic Times: “Worst Global Dollar GDP Recession In 50 Years”

Plunging Into Difficult Economic Times: “Worst Global Dollar GDP Recession In 50 Years”

economic-storm

This article was written by Tyler Durden and originally published at Zero Hedge.

Editor’s Comment: Those who follow this website and others who cover similar information have known of these trends for a while, but it is revealing nonetheless to see how deep the recession has reached in raw numbers. The role of the Federal Reserve has been disastrous for the American people, and the more that its chairmen and chairwoman intervene – in either direction – the worse it seems to get.

If the graph can be interpreted literally, we are clearly headed for the most severe restructuring of wealth and power since shortly after the last world war. How long until the next war heads our way?

The Truth Comes Out: “This Is The Worst Global Dollar GDP Recession In 50 Years”

The following brief summary of the global economic situation should, once and for all, end all debate about whether the world is “recovering” or is now mired deep in a recession.

failure

Failure of Government

From DB’s 2016 Credit Outlook

Debt has continued to climb since the crisis with Global Debt/GDP still on the rise, with no obvious sign of when this rise stops for many major countries. Indeed much of the post GFC increase in debt has been raised on the back of the commodity super-cycle which is currently unraveling in EM and the US HY market. Outside of this, the US overall has de-levered to some degree but even there debt levels remain very high relative to all of history excluding the GFC period.

With limited tolerance from the authorities to see defaults erode the huge debt burden, the best hope for a more normal financial system is for activity levels to increase so we can slowly grow the economy into the debt burden. However this requires strong nominal GDP growth and we continue to see the opposite. The left hand graph of Figure 6 looks at a global weighted average of Nominal GDP growth in the G7. On this measure we are still seeing historically weak activity.

In dollar terms the situation is even worse. The right hand chart of Figure 6 shows a much more volatile global NGDP series which converts the size of each economy in dollar terms and then looks at the growth rate YoY. With the recent strength in the USD we are seeing a huge global dollar nominal GDP recession – the worst since the 1960s. Whilst this might not be a series that is followed, it does show the sharp contraction of dollar activity levels in the global economy over the last year or so which has to have ramifications given it’s the most important global financial market currency.

What DB did not point out but is obvious, is that the synthetic dollar squeeze of the past year has made the global collapse now even worse than what was experienced during the great financial crisis, and it is getting worse by the day. We are at the End of the Road for the FED

And so, with the world trapped in the worst USD-based GDP recession in 50 years, here is the question for Yellen: with every other central bank easing and the Fed tightening, what happens to i) the USD in the future and ii) to future world growth in USD. When does the war start ? Very soon.

Zeitgeist movie here, worth the time to watch the US endtimes.

Nouriel Roubini – Is Capitalism Doomed ?

Nouriel Roubini is a professor of economics at NYU

The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anaemic and sub-par in most advanced economies given painful deleveraging.

Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging
As the economic crisis persists around the globe, the value of capitalism continues to be questioned [GALLO/GETTY]

The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession. A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0. But the subsequent recovery has been anaemic and sub-par in most advanced economies given painful deleveraging.

Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion. Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling. Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns.

dollars

Debt-based Money from the FED

Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery. Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing”, ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all. Now they have run out of rabbits.

Fiscal policy currently is a drag on economic growth in both the eurozone and the UK. Even in the US, state and local governments, and now the federal government, are cutting expenditure and reducing transfer payments. Soon enough, they will be raising taxes.

Another round of bank bailouts is politically unacceptable and economically unfeasible: most governments, especially in Europe, are so distressed that bailouts are unaffordable; indeed, their sovereign risk is actually fuelling concern about the health of Europe’s banks, which hold most of the increasingly shaky government paper.

Pyramid of Capitalism

Pyramid of Capitalism

Nor could monetary policy help very much. Quantitative easing is constrained by above-target inflation in the eurozone and UK. The US Federal Reserve will likely start a third round of quantitative easing (QE3), but it will be too little too late. Last year’s $600bn QE2 and $1tn in tax cuts and transfers delivered growth of barely three per cent for one quarter. Then growth slumped to below one per cent in the first half of 2011. QE3 will be much smaller, and will do much less to reflate asset

Govt data or actual inflation, choose one

Govt data or actual inflation, choose one

prices and restore growth.

Currency depreciation is not a feasible option for all advanced economies: they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time. So relying on exchange rates to influence trade balances is a zero-sum game. Currency wars are thus on the horizon, with Japan and Switzerland engaging in early battles to weaken their exchange rates. Others will soon follow.

Meanwhile, in the eurozone, Italy and Spain are now at risk of losing market access, with financial pressures now mounting on France, too. But Italy and Spain are both too big to fail and too big to be bailed out. For now, the European Central Bank will purchase some of their bonds as a bridge to the eurozone’s new European Financial Stabilisation Facility. But, if Italy and Spain lose market access, the EFSF’s €440 bn ($627bn) war chest could be depleted by the end of this year or early 2012.

Then, unless the EFSF pot were tripled – a move that Germany would resist – the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece. Coercive restructuring of insolvent banks’ unsecured debt would be next. So, although the process of deleveraging has barely started, debt reductions will become necessary if countries cannot grow or save or inflate themselves out of their debt problems.

So Karl Marx, it seems, was partly right in arguing that globalisation, financial intermediation run amok, and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labour income, increases inequality and reduces final demand.

Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness. Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities.

To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.

The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment. It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.

Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalised economy. The alternative is – like in the 1930s – unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.

Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial policy.

Source: Al Jazeera

Oil Glut leads to a new World of Energy

Why an Oil Glut May Lead to a New World of Energy

August 13, 2015
by Michael T. Klare and Tom Engelhardt

This post first appeared at TomDispatch.com.

Screenshot from Bill Moyers video of Bill McKibben 360.org protest of Keystone Pipeline at the White House in 2013.
Introduction
By Tom EngelhardtOn July 14, 2011, at TomDispatch, Bill McKibben wrote that he and a few other “veteran environmentalists” had issued a call for activists to descend on the White House and “risk arrest to demand something simple and concrete from President Obama: that he refuse to grant a license for Keystone XL, a new pipeline from Alberta to the Gulf of Mexico that would vastly increase the flow of tar sands oil through the U.S., ensuring that the exploitation of Alberta’s tar sands will only increase.” It must have seemed like a long shot at the time, but McKibben urged the prospective demonstrators on, pointing out that “Alberta’s tar sands are the continent’s biggest carbon bomb,” especially “dirty” to produce and burn in terms of the release of carbon dioxide and so the heating of the planet.

Just over four years later, the president, whose administration recently green-lighted Shell to do test-drilling in the dangerous waters of the American Arctic, opened the South Atlantic to new energy exploration and drilling earlier this year, and oversaw the expansion of the fracking fields of the American West, has yet to make, or at least announce, a final decision on that pipeline. Can anyone doubt that, if there had been no demonstrations against it, if it hadn’t become a major issue for his “environmental base,” the Keystone XL would have been approved without a second thought years ago? Now, it may be too late for a variety of reasons.

The company that plans to build the pipeline, TransCanada Corporation, already fears the worst — a presidential rejection that indeed may soon be in the cards. After all, we’ve finally hit the “legacy” part of the Obama era. In the case of war, the president oversaw the escalation of the conflict in Afghanistan soon after taking office, sent in the bombers and drones, and a year ago plunged the country back into its third war in Iraq and first in Syria.  Only late in his second term has he finally overseen an initiative worthy of a less warlike legacy: the embattled Iran nuclear deal. Similarly, the man who headed an “all of the above” administration on energy policy in an era in which the U.S. became “Saudi America” has only now launched a legacy-shaping climate change initiative that could matter, aimed at cutting back carbon dioxide emissions from coal-powered plants. So maybe in this legacy era, the Keystone XL will be next to fall. Or maybe Obama will let his final year and a half play out without a decision on whether or not to build it and turn the issue over to Hillary Clinton, who refuses to commit on the matter, or one of 17 Republicans, all of whom would build a pipeline to anywhere carrying anything rather than enact a single climate change initiative, no matter how mild.

Another factor has, however, entered the picture.  As Michael Klare, TomDispatch’s resident energy expert and the author of The Race for What’s Left, explains, the dynamics of the energy industry may be changing in a way that could sink Canada’s vast tar sands enterprise in a sea of red ink.  If so, the tar sands industry, already hit hard by the plunge in oil prices last year, may face an even more rugged future.

“If you build it, he will come” is the classic tag line from the movie Field of Dreams. For the Keystone XL pipeline, however, that might someday have to be rewritten as: “If you build it, it won’t come.”  Even if built, it might prove to be a pipeline to nowhere. Let Klare explain why.

Double-Dip Oil Rout
By Michael Klare

The plunge of global oil prices began in June 2014, when benchmark Brent crude was selling at $114 per barrel. It hit bottom at $46 this January, a near-collapse widely viewed as a major but temporary calamity for the energy industry.  Such low prices were expected to force many high-cost operators, especially American shale oil producers, out of the market, while stoking fresh demand and so pushing those numbers back up again.  When Brent rose to $66 per barrel this May, many oil industry executives breathed a sigh of relief.  The worst was over.  The price had “reached a bottom” and it “doesn’t look like it is going back,” a senior Saudi official observed at the time.

Skip ahead three months and that springtime of optimism has evaporated.  Major producers continue to pump out record levels of crude and world demand remains essentially flat. The result: a global oil glut that is again driving prices toward the energy subbasement.  In the first week of August, Brent fell to $49, and West Texas Intermediate, the benchmark for U.S. crude, sank to $45. On top of last winter’s rout, this second round of price declines has played havoc with the profits of the major oil companies, put tens of thousands of people out of work, and obliterated billions of dollars of investments in future projects. While most oil-company executives continue to insist that a turnaround is sure to occur in the near future, some analysts are beginning to wonder if what’s underway doesn’t actually signal a fundamental transformation of the industry.

Recently, as if to underscore the magnitude of the current rout, ExxonMobil and Chevron, the top two U.S. oil producers, announced their worst quarterly returns in many years.  Exxon, America’s largest oil company and normally one of its most profitable, reported a 52% drop in earnings for the second quarter of 2015.  Chevron suffered an even deeper plunge, with net income falling 90% from the second quarter of 2014.  In response, both companies have cut spending on exploration and production (“upstream” operations, in oil industry lingo).  Chevron also announced plans to eliminate 1,500 jobs.

Painful as the short-term consequences of the current price rout may be, the long-term ones are likely to prove far more significant.  To conserve funds and ensure continuing profitability, the major companies are cancelling or postponing investments in new production ventures, especially complex, costly projects like the exploitation of Canadian tar sands and deep-offshore fields that only turn a profit when oil is selling at $80 to $100 or more per barrel.

According to Wood Mackenzie, an oil-industry consultancy, the top firms have already shelved $200 billion worth of spending on new projects, including 46 major oil and natural gas ventures containing an estimated 20 billion barrels of oil or its equivalent.  Most of these are in Canada’s Athabasca tar sands (also called oil sands) or in deep waters off the west coast of Africa.  Royal Dutch Shell haspostponed its Bonga South West project, a proposed $12 billion development in the Atlantic Ocean off the coast of Nigeria, while the French company Total has delayed a final investment decision on Zinia 2, a field it had planned to exploit off the coast of Angola.  “The upstream industry is winding back its investment in big pre-final investment decision developments as fast as it can,” Wood Mackenziereported in July.

As the price of oil continues on its downward course, the cancellation or postponement of such mega-projects has been sending powerful shock waves through the energy industry, and also ancillary industries, communities, and countries that depend on oil extraction for the bulk of their revenues. Consider it a straw in the wind that, in February, Halliburton, a major oil-services provider,announced layoffs of 7% of its work force, or about 6,000 people.  Other firms have announced equivalent reductions.

Such layoffs are, of course, impacting whole communities.  For instance, Fort McMurray in Alberta, Canada, the epicenter of the tar sands industry and not so long ago a boom town, has seen its unemployment rate double over the past year and public spending slashed.  Families that once enjoyed six-digit annual incomes are now turning to community food banks for essential supplies.  “In a very short time our world has changed, and changed dramatically,” observes Rich Kruger, chief executive of Imperial Oil, an Exxon subsidiary and major investor in Alberta’s tar sands.

A similar effect can be seen on a far larger scale when it comes to oil-centric countries like Russia, Nigeria, and Venezuela.  All three are highly dependent on oil exports for government operations.  Russia’s government relies on its oil and gas industry for 50% of its budget revenues, Nigeria for 75%, and Venezuela for45%.  All three have experienced sharp drops in oil income.  The resulting diminished government spending has meant economic hardship, especially for the poor and marginalized, and prompted increased civil unrest.  In Russia, President Vladimir Putin has clearly sought to deflect attention from the social impact of reduced oil revenue by ­whipping up patriotic fervor about the country’s military involvement in Ukraine.  Russia’s actions have, however, provoked Western economic sanctions, only adding to its economic and social woes.

No Relief in Sight

What are we to make of this unexpected second fall in oil prices?  Could we, in fact, be witnessing a fundamental shift in the energy industry?  To answer either of these questions, consider why prices first fell in 2014 and why, at the time, analysts believed they would rebound by the middle of this year.

The initial collapse was widely attributed to three critical factors: an extraordinary surge in production from shale formations in the United States, continued high output by members of the Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia, and a slackening of demand from major consuming nations, especially China.
According to the Energy Information Administration of the Department of Energy, crude oil production in the United States took a leap from 5.6 million barrels per day in June 2011 to 8.7 million barrels in June 2014, a mind-boggling increase of 55% in just three years.  The addition of so much new oil to global markets — thanks in large part to the introduction of fracking technology in America’s western energy fields — occurred just as China’s economy (and so its demand for oil) was slowing, undoubtedly provoking the initial price slide.  Brent crude went from $114 to $84 per barrel, a drop of 36% between June and October 2014.

Historically, OPEC has responded to such declines by scaling back production by its member states, and so effectively shoring up prices.  This time, however, the organization, which met in Vienna last November, elected to maintain production at current levels, ensuring a global oil glut.  Not surprisingly, in the weeks after the meeting, Brent prices went into free fall, ending up at $55 per barrel on the last day of 2014.

Most industry analysts assumed that the Persian Gulf states, led by Saudi Arabia, were simply willing to absorb a temporary loss of income to force the collapse of U.S. shale operators and other emerging competitors, including tar sands operations in Canada and deep-offshore ventures in Africa and Brazil.  A senior Saudi official seemed to confirm this in May, telling the Financial Times, “There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including U.S. shale, deep offshore, and heavy oils.”

Believing that the Saudi strategy had succeeded and noting signs of increasing energy demand in China, Europe, and the United States, many analysts concluded that prices would soon begin to rise again, as indeed they briefly did.  It now appears, however, that these assumptions were off the mark.  While numerous high-cost projects in Canada and Africa were delayed or cancelled, the U.S. shale industry has found ways to weather the downturn in prices.  Some less-productive wells have indeed been abandoned, but drillers also developed techniques to extract more oil less expensively from their remaining wells and kept right on pumping.  “We can’t control commodity prices, but we can control the efficiency of our wells,” said one operator in the Eagle Ford region of Texas.  “The industry has taken this as a wake-up call to get more efficient or get out.”

Responding to the challenge, the Saudis ramped up production, achieving a record 10.3 million barrels per day in May 2014.  Other OPEC members similarly increased their output and, to the surprise of many, the Iraqi oil industry achievedunexpected production highs, despite the country’s growing internal disorder.  Meanwhile, with economic sanctions on Iran expected to ease in the wake of its nuclear deal with the U.S., China, France, Russia, England, and Germany, that country’s energy industry is soon likely to begin gearing up to add to global supply in a significant way.

With ever more oil entering the market and a future seeded with yet more of the same, only an unlikely major boost in demand could halt a further price drop.  Although American consumers are driving more and buying bigger vehicles in response to lower gas prices, Europe shows few signs of recovery from its present austerity moment, and China, following a catastrophic stock market contraction in June, is in no position to take up the slack.  Put it all together and the prognosis seems inescapable: low oil prices for the foreseeable future.

A Whole New Ballgame?

Big Energy is doing its best to remain optimistic about the situation, believing a turnaround is inevitable. “Globally in the industry $130 billion of projects have been delayed, deferred, or cancelled,” Bod Dudley, chief executive of BP,commented in June.  “That’s going to have an impact down the road.”

But what if we’ve entered a new period in which supply just keeps expanding while demand fails to take off?  For one thing, there’s no evidence that the shale and fracking revolution that has turned the U.S. into “Saudi America” will collapse any time soon.  Although some smaller operators may be driven out of business, those capable of embracing the newest cost-cutting technologies are likely to keep pumping out shale oil even in a low-price environment.

Meanwhile, there’s Iran and Iraq to take into account.  Those two countries are desperate for infusions of new income and possess some of the planet’s largest reserves of untapped petroleum.  Over the decades, both have been ravaged by war and sanctions, but their energy industries are now poised for significant growth.  To the surprise of analysts, Iraqi production rose from 2.4 million barrels per day in 2010 to 4 million barrels this summer.  Some experts are convinced that by 2020 total output, including from the country’s semiautonomous Kurdistan region, could more than double to 9 million barrels.  Of course, continued fighting in Iraq, which has already lost major cities in the north to the Islamic State and its new “caliphate,” could quickly undermine such expectations.  Still, through years of chaos, civil war, and insurgency, the Iraqi energy industry has proven remarkably resilient and adept first at sustaining and then boosting its output.

Iran’s once mighty oil industry, crippled by fierce economic sanctions, has suffered from a lack of access to advanced Western drilling technology.  At about 2.8 million barrels per day in 2014, its crude oil production remains far below levels experts believe would be easily attainable if modern technology were brought to bear.  Once the Iran nuclear deal is approved — by the Europeans, Russians, and Chinese, even if the U.S. Congress shoots it down — and most sanctions lifted, Western companies are likely to flock back into the country, providing the necessary new oil technology and knowhow in return for access to its massive energy reserves.  While this wouldn’t happen overnight — it takes time to restore a dilapidated energy infrastructure — output could rise by one million barrels per day within a year, and considerably more after that.

All in all, then, global oil production remains on an upward trajectory.  What, then, of demand?  On this score, the situation in China will prove critical.   That country has, after all, been the main source of new oil demand since the start of this century.  According to BP, oil consumption in China rose from 6.7 million barrels per day in 2004 to 11.1 million barrels in 2014.  As domestic production only amounts to about 4 million barrels per day, all of those additional barrels represented imported energy.  If you want a major explanation for the pre-2014 rise in the price of oil, rapid Chinese growth — and expectations that its spurt in consumption would continue into the indefinite future — is it.

Woe, then, to the $100 barrel of oil, since that country’s economy has been cooling off since 2014 and its growth is projected to fall below 7% this year, the lowest rate in decades.  This means, in turn, less demand for extra oil.  China’s consumption rose only 300,000 barrels per day in 2014 and is expected to remain sluggish for years to come.  “[T]he likelihood now is that import growth will be minimal for the next two or three years,” energy expert Nick Butler of the Financial Timesobserved.  “That in turn will compound and extend the existing surplus of supply over demand.”

Finally, don’t forget the Paris climate summit this December.  Although no one yet knows what, if anything, it will accomplish, dozens of countries have already submitted preliminary plans for the steps they will pledge to take to reduce their carbon emissions.  These include, for example, tax breaks and other incentives for those acquiring hybrid and electric-powered cars, along with increased taxes on oil and other forms of carbon consumption.  Should such measures begin to kick in, demand for oil will take another hit and conceivably its use will actually drop years before supplies become scarce.

Winners and Losers

The initial near collapse of oil prices caused considerable pain and disarray in the oil industry.  If this second rout continues for any length of time, it will undoubtedly produce even more severe and unpredictable consequences. Some outcomes already appear likely: energy companies that cannot lower their costs will be driven out of business or absorbed by other firms, while investment in costly, “unconventional” projects like Canadian tar sands, ultra-deep Atlantic fields, and Arctic oil will largely disappear.  Most of the giant oil companies will undoubtedly survive, but possibly in downsized form or as part of merged enterprises.

All of this is bad news for Big Energy, but unexpectedly good news for the planet. As a start, those “unconventional” projects like tar sands require more energy to extract oil than conventional fields, which means a greater release of carbon dioxide into the atmosphere. Heavier oils like tar sands and Venezuelan extra-heavy crude also contain more carbon than do lighter fuels and so emit more carbon dioxide when consumed. If, in addition, global oil consumption slows or begins to contract, that, too, would obviously reduce carbon dioxide emissions, slowing the present daunting pace of climate change.

Most of us are used to following the ups and downs of the Dow Jones Industrial Average as a shorthand gauge for the state of the world economy.  However, following the ups and downs of the price of Brent crude may, in the end, tell us far more about world affairs on our endangered planet.


The views expressed in this post are the author’s alone, and presented here to offer a variety of perspectives to our readers.

The US Bond Market Bubble May Blow

The US Bond Market is far Larger than the Stock Market: If Even Part of it Blows, it’ll Dig a Magnificent Crater

by Wolf Richter • 

“So, if rates rise, we get nervous. If rates fall, we get nervous. If rates stay the same, we get nervous. When don’t we get nervous? Raise the rates already! We are talking an idling .25% not 3.5% where we should be to make saving pay, and borrowing a cautionary endeavor as it should be!”

That’s the lament posted by a WOLF STREET commenter on Monday afternoon. here

“Perhaps investors are getting nervous because the price action is so bad,” explained DoubleLine Capital CEO Jeffrey Gundlach on Monday about the selling pressures junk bonds have come under after Fed Chair Janet Yellen’s press conference, which had been, in his words, “a little bit of a debacle.”

Boom and Bust Man

Boom and Bust Man

He complained that Yellen had thrown uncertainty and confusion over financial markets, as Fed heads “kind of no longer have a framework” to go by.

He’s always talking up his $80-billion book, which is full of bonds. He has a lot to lose when rates rise and bonds decline in value. So he said that raising rates this year would be a “policy mistake.”

It certainly would be for him, having ridden the greatest bond bull market all the way to its peak while extracting a ton of fees along the way.

Bond-fund managers like Gundlach already had a few scares to deal with, including the “Taper Tantrum” in the summer of 2013 in reaction to the Fed’s discussions on tapering QE Infinity out of existence, then the “flash crash” in the Treasury market last October 15, and for the past year, the not-so-flash crash in energy junk bonds.

Folks have reason to be nervous about bonds.

Fiat Currency with QE monry printing

Fiat Currency with QE monry printing

Bonds are supposed to be a conservative investment, safer and more predictable than stocks and a host of other asset classes. But bonds are on edge, and investors can see it. And they can see the sheer magnitude of it.

In 2000, the US stock market was valued at $15 trillion and the US bond market at $17.3 trillion, according to the Wall Street Journal. By this year, US stock market capitalization has jumped 76% to $26.3 trillion. But bond market capitalization has soared 125% to $39.5 trillion.

That increase in the bond market was driven largely by enormous, record-breaking issuance by corporate and government entities.

But there’s even more: an additional $9.6 trillion of US-dollar-denominated bonds issued by corporations and governments outside the US. Just paying interest on this debt is going to be a herculean task where local currencies, as in Brazil, have plunged against the dollar [read…World Is Now “More Exposed than Ever” to Explosive Dollar].

So, $50 trillion of dollar-denominated bonds (not counting other debt, such as loans, and products based on them, such as Collateralized Loan Obligations).

Greed and Wealth

Greed and Wealth

These bonds are now perched precariously on edge, after a three-decade bond bull market that culminated with seven years of interest rate repression and QE which pushed yields of even the riskiest junk to ludicrously low levels and prices into the stratosphere. If even part of the bond market blows, given its magnitude, it’s going to dig a magnificent crater.

Amidst the Fed’s cacophony and flip-flopping about raising rates, Fed heads are coming out and putting a rate hike this year back on the table, thus turning this whole thing into a comic zoo, and it would be truly hilarious, if it weren’t for, among other things, the $50 trillion in bonds….

Higher rates could knock already stressed corporate and municipal borrowers off their feet. But it would come at the worst possible time, now that bonds of all kinds have migrated more and more into bond mutual funds and ETFs. Retail investors have poured $1.5 trillion into these funds since 2007 (compared to $829 billion they poured into stock funds over the same time). Bond funds now own 17% of all corporate bonds, nearly double from just before the Financial Crisis.

A portion of these bonds are junk bonds. In the era of near-zero interest rates, bond-fund managers have bought the riskiest bonds so that their slightly higher yields would infuse some oomph into their funds. Many of these junk bonds are now slated for destruction, with energy junk bonds already there.

But this concentration of ownership by bond funds poses its own issues, including larger price drops during times of stress. The Wall Street Journal:

Domestically, the rise of large bond funds has created new risks. As the funds have grown, so has cross-ownership of the same bonds, increasing the likelihood of contagion if one manager starts selling, the International Monetary Fund says. Regulators worry that many investors may not know what is in their funds. A market downswing could lead to rising redemptions of fund shares, prompting funds to sell assets to raise cash and amplifying selling pressure across the market.

Treasuries might not be spared the selloff either. But in the short term, they might be winners if investors get cold feet with their other instruments of capital destruction. Even a small sell-off, whether in stocks or bonds, sends investors scurrying in search of perceived safety. Even during the mini-swoon today, with the S&P 500 down 1.6% and the Nasdaq down 2% as I’m writing this, Treasuries suddenly look appetizing, prices rise, and yields fall. And for now, the 10-year yield has dropped 8 basis points to 2.12%, despite the Fed rate-hike cacophony.

But the Fed has offered no “satisfactory answer” why it’s still “stuck in emergency mode,” explained St. Louis Fed President James Bullard to distance himself from this debacle. Read…Bullard Fires Broadside at Fed, Shrapnel Hits his Foot

Measure
Measure

Shadow banks collapsing soon

Shadow Banks Explained In This Criticl Article Worth Reading Twice

It sounds cool. But what does it mean?

Though economists struggle to define shadow banks in laymen terms, or explain why the public should care, it is actually really simple; it’s just a disguised bank that dodges banking regulationsby dividing up its business model, and it’s a problem because they’re unregulated, huge, and if they fail we all fail -again. Through various loopholes, innovative business structures, and corporate partnerships, shadow banks have reinvented what it means to be a bank, and it’s paid off.

Former Federal Reserve Chairman, Ben Bernanke, described shadow banking as -basically- multiple businesses that, “…collectively, [carried] out traditional banking functions–but do so outside…” of the traditional banking system; by partitioning a single bank into multiple businesses and then working in concert with one another, the shadow banking system can bypass rules and safeguards. And by doing so they’ve grown bigger than the traditional banking sector; which is the scary part.

Traditional banks have baseline regulations that help them stay within comfortable operating capacity. There are hard minimums of actual money traditional banks are required to have, that is directly related to the amount of loans they have given. They also are required to stay within certain parameters when issuing interest rates. And deposit accounts are insured, to increase public trust and avoid a bank run, and a system-wide fractional reserve default. These might sound complicated, however these are very simple regulations, that have very real benefits; that shadow banks don’t have to comply with.

Economists often talk about all of this in very arduous terms, describing shadow banks as “banking intermediaries” that work in a “network” without “capital requirements”, “float” and “leverage restrictions.” The reality is, it’s not as complicated as economists make it seem -or at least it can be explained in a far more accessible way. Shadow banks are generally a financial institutions that has disaggregated its business model. Itemizing every function of the bank as an individual business and placing each individual business under one umbrella corporation. So instead of a single bank, shadow banks are usually mega corporations that house compartmentalized baking entities within them, that collectively do the same thing, except without rules.

With a normal bank, deposits accounts aggregate into pools (with excess becoming capital reserves) and from the pools credit is created. This is classic fractional reserve banking model. Joe deposits $10 into a bank, and the bank loans Sue $100, with interests, but the bank has to make sure it always has 10% of money on hand for all of its loans, in the off-chance that Joe withdraws his $10, the bank usually has that covered by excess reserves or “float.” This ability of banks to create large loans out of deposits that are fractional in value is at the heart of their business, it’s their “credit creation” function. This ability for banks to create credit is great for economic stimulation, but it’s also dangerous, because banks are on the hook for huge loans, with very little to back it up with, this “leverage” is a liability without a sustainable amount of capital.

Shadow banks don’t have capital requirements, they can take very little capital and leverage it to infinity. So their balance sheets show massive liabilities. How does this happen? Post-mortgage crisis regulators have become dove-ish on regulating the financial sector, for a variety of reasons. The shadow banking sector acted as a catalysts to the mortgage crash, lending out millions of sub-prime mortgages through lending houses, that weren’t deemed “banks.” Those mortgages were sold in bundles to investment banks, and hedge funds, which are also not considered “banks.”

Shadow banks have been left unregulated in the years following the crash, even though they caused it. Monetary policy and domestic policy have done their best to incentivize Wall Street and Big Banks, because the “capital markets” are seen as a driver of economic growth. As a result of dove-ish regulations shadow banks have exponentially grown, meanwhile normal banks continue to be regulated, which gives a huge advantage to the unregulated shadow banking sector. Meaning there are two parallel sectors of the economy, that functionally do the same thing, they’re playing by two different sets of rules; and of the two of them, the one that has some basic limitations on how badly it can blow up in our faces is the one at a huge disadvantage. Which is a problem for obvious reasons.

https://criticl.me/    This website tells us why we face financial disaster this year, on a variety of topics by public intellectuals who cannot find an outlet for their research and insight.

America is done

Chris Hedges and the end of the American Empire

https://youtu.be/I-mrwMURq9k