Monday Morning In The Marketplace

It’s almost mid month and the auguries of Janus have turned most negative.  We are all Charlie is fading into the media sunset, what did you expect?  I suppose the sleeper cells will not come out of the woodwork but I do not expect to see them multiply like their brethren, the roach, where with a little borax sprinkled about one can be rid of them.  Yes, that’s right, a little 20 mule team borax is far safer than sprays and works exceedingly well.  I am afraid we will always have the terrorist with us, it is in our nature to not only suffer their abuse but to greatly encourage it.  But that is a subject for another blog.

Oil is in the mid forties and will not stay there.  While all the talking heads on the financial and market networks love to boost the economy and shill for the big banks and financial houses, it is rather difficult to determine just what one should call Goldman Sacks except a vampire squid, or perhaps more respectfully Master of the Universe and ruler of our government, all the talk cannot solve the underlying problem facing all economies today.  Our modern Frankenstein monster called Credit and it is eating the world alive.  In North Dakota the state has acknowledged that at least half the well production of oil and gas cannot operate at the current crude and natural gas prices.  Why, credit.  There has been on oil drill is west Texas formally file bankruptcy and they are simply beating the rush for later in the year.  If these companies had sunk their own capital into the drilling and production then they might have stood a chance of at least staying in place until prices pick back up later this year.  Of course that assumes that the excess supply will be absorbed very easily in this year and next.  It also assumes that the Russians and a few others come to heel at the Saudi command.  Very simply put, the oil business so many years ago has gone from a wildcatting business in which a very minimum amount of money was needed to strike it rich, that is find oil only several hundreds of feet below the ground and start pumping.  Fields were developed and the automobile industry started to help consumers churn out demand.

Enter the buyout, the corporate beginnings of oil development, the overseas combines and government sanctioned drilling.  Oil has become one of the largest businesses in the world for the simple reason that energy drives industry and the consumer.  Many environmentalists decry that Oil is king and wish to subvert its importance.  But one can’t subvert the cost per BTU.  And only coal is cheaper and more abundant.  Scare us with fake global warming and now subversive climate change, but it’s still down to pocket books, the money in your pocket and mine.  The question is why should I pay ten times the cost for energy just to make you feel good, particularly when I can’t afford five times that cost?  So what do we know about the cost of oil supplies?  It takes money, lots of money.  And guess what, credit is the same as money, for all you stupid MMT people out there.  But credit is not free, it comes at a cost and that cost is future earnings, pure and simply.  Own today what it will take you many days of tomorrow to pay for, maybe even a lifetime.  Think of it this way, if everyone paid cash for all their daily needs, wants, and desires, if they all cut their credit cards in half and never used them again, if they paid cash for their automobiles and houses, there would be no consumer credit.  And all of those industries and businesses that depend on consumers buying on credit, piling up the debt into a future of decades of payments, would collapse.

Well, guess what, has anyone been paying attention to the financial figures this past year?  Consumer debt has contracted for the last year.  Do you know what that means?  One is that despite all the bull crap from the President and his council of economic idiots, the Federal Reserve Bank, and the financial media, unemployment still is high.  How do we know?  Because the population participation rate has dropped to its lowest point in 38 years.  And all those newly created jobs are, for the most part, part time minimum wage or low wage jobs.  But hey, you get free health care insurance.  Great, just, 1, find a doctor or hospital who will treat you, and 2 use your insurance card to see just how much your plan doesn’t cover.  Got lots of copay money, then you’re safe.  Your plan actually cover anything, then you’re safe.  Got an employer who actually buys a policy and pays his part of it and it covers most of what you need, then you’re safe.  So now we have far more people in this country who can’t afford to be sick, have no job, or if they do it is part time and pays minimum wage, and you expect that retails sales will pick up?  Hell, the country is already up to its collective ass in no down payment auto loans.  Do you really believe Detroit will exist on credit fumes for the next decade?  And due to the brightness of our constitutional law scholar President we are going to send every child to community college for free and rebuild communities with 3% down home mortgages.  I tell you, we gots lots of bubbles to build before the sky falls.  Perhaps you will believe that Obama can restore oil to $100 a barrel with a stroke of his executive action pen.  Reality is the pits when all your beliefs turn out to be wrong.

Okay, so what else happens?  Surely there are some countries that have done things somewhat right.  Yes, there are countries that have avoided the temptation to indulge in gross government dependence of debt, both internal and foreign, and whose consumers aren’t living in the past and paying for the future.  But they are, for the most part, undeveloped or under developed.  So let us take a look at the world of trade.  Germany’s economy is very dependent on exports.  If fact, a great deal of the EU trade depends on exports outside of the EU.  Now Germany exports to the likes of Spain, France, and other EU countries while limiting its imports from those countries.  And it exports a significant amount of goods and services to China.  France and Spain also export to China.  But China has been in a slump as of late.  They have built the cities where almost no one lives and factories where almost nothing is produced or people work.  In fact it is starting to become clean that much of that manic building period was little more than a make work economy in so many areas of China.  Back in the 1990 China had become the Japan of the fifties.  It made all those crappy toys and other consumer goods.  Then it pulled a fast one.  American and European industries, corporations, and finance had to buy a stake in China but only as minority partners and China got to say what their legal rights were.  China had the low wage and low skilled labor to boost her economy and soon we were training their workers for those better but not necessarily higher paying job.  Keep the labor cheap, keep your currency cheap by pegging it artificially low against the dollar, and you can legally steal from the world.  Of course this is a beggar thy neighbor policy that assumes there is an inexhaustible supply for one’s goods and services.  This think never comes true.

On the other hand, if one is an undeveloped or under developed country and has massive pools, relatively speaking of course, one can do the simple low wage work and sell the unfinished goods, parts, etc to China.  The Chinese know how to make a buck even if it costs their countrymen a job.  And where commodities exporting countries were rolling in wealth with every shipload of commodity they sent to China, they now face the bursting of their own property bubbles and credit bubbles.  You see, commodities are mined in areas where most people do not like to live.  So one needs to buy expensive machinery and hire expensive skilled labor to extract those commodities  This means that more money is put into the economy through corporate borrowing and expenditure.  Well, it soon comes to pass that as people make more money they tend to spend more money, I mean what else will you do wit it, save it for your old age?  So not we have the consumer credit bubble because people always want to buy more than their paychecks will allow unless they buy on credit.  Buying on credit assumes that one will always have a job and that one;s income will always go up and that ones assets will always go up.  Of course when you are ready to sell that vastly over priced house and want to retire to some nice little downsized housing unit one must keep in mind that prices are relative and you are not getting that bargain you though would come in your retirement.

Now in an earlier post I outlined how the over supply developed and let us just say that it has developed due to two pressures.  The first is that the world is pumping more oil at the well head than can be refined and consumed.  And that two, the world is consuming less, there by pulling down demand.  Well, why is the use of oil declining?  And will it continue to decline?  To the first, its declining use is due to the various economic downturns world wide.  Those who have gotten rich in the undeveloped and under developed nations may be buying more automobiles and trucks and using more fuel, but their consumption has a very marginal effect on production.  And since the retail trade in Europe and the Americas has turned down, particularly in the United States but remember hat Canada is starting to see that same effect, fewer goods are being bought world wide and China has become the world’s manufacturing center, well yes and no, but let us leave it there for a moment.  That means there is a great slow down in China as far as manufacturing and construction.  But ultimately it is the credit slowdown.

What could I mean by credit slowdown.  It is essentially a two sided coin, not that I would know what a three sided coin would look like, where you have the expansion or extending of credit through various forms of debt, and the maintenance and repayment of credit, the interest paid and the principle repaid, even if it is rolled over into another form of debt and length of time.  You see, the iron law of debt or credit, if you like, is simply this.  Debt is either repaid or reputed.  There is no in between form.  One may extend the debt repayment through any varieties of actions such as roll overs, reschedules, and the like, but there can only be one of two permanent outcomes,  If you belong to the Greek political party Syriza then you have already stopped paying your taxes, the ones used to pay the interest on Greek government loans issued by the ECB and the IMF.  And since it would appear that Syriza will win the elections of Jan 26th, we will most likely see a repudiation of those government bonds by the new government.  That will create a credit event, another nice word for default and all the CDO and other derivatives will come into play.  The problem is that all those who issued the credit derivatives really can’t afford to pay them.  That means some of those issuers will default on their obligations and by the way don’t you know there are derivatives that back those defaults and the life of the part goes on.  Time to rearrange the deck chairs on the Titanic.

Well, with the Russians leaning towards economic collapse and the Ukrainians already there, not much of a victory to over run a bankrupt country and then have to rebuild it by yourself, the Greeks will help kick off the dominoes and whether we will have an orderly global economic collapse depends on just how well our world bankers place each domino.  If I could find a bookie who I knew would pay off I would bet disorderly collapse.  But hey, that’s a sucker’s bet and no bookie would take it.  So what all this means is that if the Russians and a few of the other oil producing states do not agree to reduce their pumping and thus reduce world supply by mid year, then oil goes down towards $20 a barrel and all those hundreds of trillions of world wide debt come crashing down, devil take the hindmost.  As far as Russia going to war, well, that is difficult when its own economy has crashed down around its feet.  The army will not fight to save Putin’s honor if they get no food and shelter.  Paper script can only be burned for heat and the winter is here.  I here tell it gets cold in the Ukraine during the winter.


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