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Page added on November 3, 2014
Kunstler: Signs and Wonders
“Holy smokes,” Janet Yellen must have barked last week when Japan stepped up to plug the liquidity hole left by the US Federal Reserve’s final taper trot to the zero finish line of Quantitative Easing 3. The gallant samurai Haruhiko Kuroda of Japan’s central bank announced that his grateful nation had accepted the gift of inflation from the generous American people, which will allow the island nation to fall on its wakizashi and exit the dream-world of industrial modernity it has struggled through for a scant 200 years.
Money-printing turns out to be the grift that keeps on giving. The US stock markets retraced all their October jitter lines, and bonds plumped up nicely in anticipation of hot so-called “money” wending its digital way from other lands to American banks. Euroland, too, accepted some gift inflation as its currency weakened. The world seems to have forgotten for a long moment that all this was rather the opposite of what America’s central bank has been purported to seek lo these several years of QE heroics — namely, a little domestic inflation of its own to simulate if not stimulate the holy grail of economic growth. Of course all that has gotten is the Potemkin stock market, a fragile, one-dimensional edifice concealing the post-industrial slum that the on-the-ground economy has become behind it.
Then, as if cued by some Satanic invocation, who marched onstage but the old Maestro himself, Alan Greenspan, Fed chief from 1987 to 2007, who had seen many a sign and wonder himself during that hectic tenure, and he just flat-out called QE a flop. He stuck a cherry on top by adding that the current Fed couldn’t possibly end its ZIRP policy, either. All of which rather left America’s central bank in a black box wrapped in an enigma, shrouded by a conundrum, off-gassing hydrogen sulfide like a roadkill ‘possum. Incidentally, Greenspan told everybody to go out and buy gold — which naturally sent the price of gold spiraling down through its previous bottom into the uncharted territory of worthlessness. Gold is now the most unloved substance in the history of trade, made even uglier by the overtures of Mr. Greenspan. Personally, I think the more violently gold devalues for the moment, the more extreme the reaction will be when the first glimpses of reality pierce the twilight’s last gleaming of official US market intervention shenanigans.
All this goes on, by the way, because an essential problem remains: the world cannot pay back its accumulated debt and the money maestros of world finance don’t dare even try to unwind it in an orderly manner, fearing they will open up an international monetary sucking chest wound of deflationary doom. And this does nothing to brighten the prospect that evermore new debt can ever be repaid. All that remains are various three card monte maneuvers, hot potato games, and musical chair tournaments using the last kinetic rocket thrusts of global credulity to pretend that contraction is not already here, walking amongst us, like the ancient Harvestman of yore, swinging his scythe.
Of course, few doubt the reality of Ebola. And ISIS (or whatever it’s called) also works its ghastly hoodoo in the gummiest region of the world, and they both share an interesting feature these days: reporters are discouraged from going into either hot zone where the threat is that they will bleed out through all the orifices from Ebola or have their heads hacked off on video by ISIS. So we are not getting the best information out of Ebola West Africa and those parts of the Middle East where ISIS is at large. The situation is apt to be rather worse than we are being told. The financial markets shrugged off both these threats by the time Halloween rolled around, but I wouldn’t be so confident that story is over for either of these two ugly influences. If the world had a face, it would have fragility written all over it.
8 Comments on "Kunstler: Signs and Wonders"
Makati1 on Mon, 3rd Nov 2014 8:00 pm
His last sentence caused me to remember the very fragile glass Christmas ornaments we have from my youth. Beautiful to look at but like tissue paper in thickness.
Our world economy is like that. To observers who have no real understanding of how it works, it still has some shine and promise. But, like the ornament, it is getting old and the finish is wearing off. Eventually a less delicate event will crush it forever. Next year? Or the next? Who knows, but soon.
Perk Earl on Tue, 4th Nov 2014 4:35 am
http://www.bloomberg.com/energy/
Oil price back on the move down after yesterday’s drop:
WTI -1.49 to 77.29
Brent -1.45 to 83.33
Jerry McManus on Tue, 4th Nov 2014 7:47 am
Funny, the last time commodities dropped like a rock a few years ago it was the beginning of what came to be know as “the great recession”.
Prices fell off a cliff not because of some fabulous treasure trove bonanza of newly discovered resources, but because there was every reason to believe that the party was in fact over and that global demand for resources, as represented by the chimera we call “money”, was evaporating into the mother of all black holes.
Care for a repeat, anyone?
shortonoil on Tue, 4th Nov 2014 8:07 am
“Oil price back on the move down after yesterday’s drop:”
Our model indicates that $76/barrel is about the bottom for this year. Longer term (the next 5 years) prices will continue downward until most producers are priced out of the market. Expect more M&As, project cancellations, and shut-ins as time progresses.
http://www.thehillsgroup.org/
Davy on Tue, 4th Nov 2014 8:36 am
This is worth reading on the subject of Perk, Jerry, and Shorts comments:
http://www.zerohedge.com/news/2014-11-03/alan-greenspan-marc-faber-i-never-said-fed-was-independent
REGAN: Marc, let’s talk a little bit about crude oil as we talk about some of these commodities here. You just told me you thought gold won’t necessarily be going higher any time soon, but over the long run a good investment. We’ve got crude oil now closing below $80 for the first time since June of 2012. Is there any floor in site here for oil or do you expect the slide to continue?
FABER: Well basically if oil falls below $75 to $70, I don’t think it will stay there because a lot of production will be cut and exploration will be cut, and actually some companies will get into serious trouble financially. The oil price decline is not necessarily very good for the United States. It helps the consumer to some extent, but a lot of capital spending has gone into oil and natural gas, and some of these companies are already today cash flow negative. So if oil prices went lower, it may actually have an adverse impact on the US economy.
REGAN: Do you think to a certain extent – and I actually wrote about – I wrote about this in – in my column in USA Today this week. I wonder to what extent, Marc, OPEC actually enjoys seeing lower prices right now because of the success of drilling in the US. In other words, it makes it far less attractive for drillers in the US to be investing in that sector.
FABER: Except too much of a good thing may not be very good for Saudi Arabia and the other oil producers. You can extract oil in Saudi Arabia at very low cost, but you have to understand the population of Saudi Arabia has now reached I think 25 million. So the social cost is very large. They need an oil price of around $80. If oil prices went down – and let me remind you oil hit a high in July 2008 at $147 and within six months it dropped to $32, but it didn’t stay there. It rebounded. And I think Saudi Arabia and most oil producers would be in trouble if the oil price went below $70 and stayed there.
REGAN: But you don’t anticipate that it will stay there. It’s – it’s supply and demand ultimately, and if it goes to $70 you see less investment and drilling and thus less supply here in the US. So $70 is the floor in your view?
FABER: Not necessarily the floor, but it won’t stay low for a very long time. I think it’s – at the present time, farmers are by and large losing money because the price of corn, wheat, soybeans has collapsed by around 50 percent from the highs and the costs are up substantially. I don’t think oil would stay down for very long because I live in an emerging economy. I can see one thing. The demand for oil in the regions of the emerging world where 80 perent of the population of the world lives is going up still from very low per capita consumption levels compared to say the European economy or the US.
So I think the long-term trend for demand is up, but obviously the decline of oil prices, some people blame it on Saudi Arabia and some other blame it on the US and who knows what, the fact is maybe the decline in oil prices tells you that the global economy is not recovering as all the bullish analysts think, but actually it’s weakening, yes, weakening. But some countries benefit from lower oil prices, particularly India.
REGAN: So in fact you see the global recovery as not really happening, that we are in an increasingly weak global environment as you look around. And certainly we see some poor data that indicates that out of Asia and Europe.
FABER: Yes. I think that in Europe we have essentially a flat (inaudible) economy. Now maybe a year they will grow at 1 percent and the next year they’ll contract at 1 percent, basically you can’t expect much growth from Europe. In China, we have now obviously – and this is well documented – a meaningful slowdown in economic growth. As a result, China also buys less resources from the resource producers in the world, from Argentina to Brazil, over (inaudible) Asia, central Asia, Russia (inaudible) and so on. And this has all an impact on these countries’ economies, and so they themselves are buying less goods from the Western world and you have the potential of a downside spiral.
shortonoil on Tue, 4th Nov 2014 10:44 am
Oil producers will not stop pumping because their wells have become unprofitable. They will only stop when their cash flow goes negative, or they can no longer borrow to supplement it. That is what is now happening in the shale business; wells have first, and perhaps second year positive cash flows but are, for the most part, long term losing money. As prices decline most producers will not shut-in production until their cash flow goes negative, and they have exhausted their credit lines. Most firms also have large amounts of depreciate-able real assets to augment their cash flow. They will continue operations after reaching breakeven to get their money out of those assets. Petroleum is now losing its ability to power the economy to the extent that its price is going down. The price of oil can be no greater than the value of the energy it provides to the end consumer. The petroleum industry is now in a long term cycloidal down trend that could take more than a decade, or two to come to its conclusion.
http://www.thehillsgroup.org/
Davy on Tue, 4th Nov 2014 11:21 am
Short, as Rock said in a previous comment somewhere, now is when M&A’s enter the mix. There will be some predation when the Sharks smell blood. If a company does not want to be consumed on the cheap they will try to manage to have a pulse and show signs of life. With this in mind some production will remain.
shortonoil on Tue, 4th Nov 2014 12:04 pm
“With this in mind some production will remain.”
The model has been quite accurate for the last 50 years. It has a correlation coefficient of 0.965 over those years(1.0 is a perfect match). Even though we have a pretty good handle on the price, its impact on the industry will be controlled, short term, by many factors. That said, its seems reasonable that we could see 10 to 15% of world production off line by 2020. If that will be the straw that breaks the camels back I think is impossible to predict; it might. If it doesn’t break his back he is sure going to develop one serious limp!