When the economy is in the deep midwinter, frosted glass renders everyone myopic

frostedglass

Yes, it’s good news for motorists as the price of oil drops and they can drive from Manchester to Manchuria for the same price that used to take them from home to the local train station. The only downside is that this is the distance they’ll have to travel just to find a job assembling dysfunctional circuit boards on a controlled wage level of one dim sum steam-basket a day.
And you too can build a 3-storey log cabin for under £30 now that the price of timber has slumped to 10p a kilometre. Mind you, with local habitation taxes soaring to £3,000 a week, this will be a short-lived bonus.
Finally, with absolutely nobody buying fridges, cookers, fitted kitchens, baths, or designer clothes, there’ll be nothing to stop you going on the sort of amazing low-cost spending spree you’ve always dreamt about…except the fact that you lost your job two months ago.

Coverage in the old media of the value of commodities is entirely divorced from the disastrous reasons why they are all falling through the floor. At times, it feels to me like some unknown Ministry is filtering every disaster through frosted glass, behind which is a world haunted by slump and debt…..so we better tell the populace that, all things considered, it’s a bargain for you, the consumer. Meanwhile, in the minority financial mgazines and business media, the mantra continues: ‘What we must have is more inflation’.
The ability of even intelligent people to fall for this bollocks never ceases to amaze me, but the glass has become frosted by nearly twenty years of people being encouraged to make no connection whatsoever between business health and financial strategy. If you are lying 24/7 about economic recovery and financial stability, obfuscation is the only viable tactic for the mendacious ones.
Yesterday, Zero Hedge wrote a piece saying that an unexpected change in the oil inventory data meant that crude ‘would surge’. Why would it do that, ZH? They too have begun to see signals with a traditional meaning as still relevant in a world which is inverted on almost every dimension. On the same day, OPEC announced that its ‘pump and flood’ game of vicious circles would continue, almost saying overtly at one point that they had deeper pockets than Texas. Amazing: nobody wants our oil, but we’re going to crush the price until the competitors die, and then one day when they do want it again, we’ll be running the place. We’ll be trillions in debt of course, but erm….

Let’s look at it in the round: Oil edged higher because we saw the first decline in U.S. inventories in 11 weeks. Lest we forget, oil is currently struggling to hold at $40; but even in that context, refiners like everyone else these days are driven by the tax accountants, and like to run down inventory to avoid too high a year-end tax bill. On the basis of the five-year average, the US figure is still 120m barrels above normal.
Much ado about nothing? Probably; but in drilling (sorry) into the industry data as a whole, I was reminded of the chickens coming home to roost (and shit) on the heads of the Let’s Get Fracking brigade. The Shale Shovers lobbied over many years to get accounting rules that let them overstate reserves potential to the maximum. But over three years ago in these columns, I pointed in vain at historical experience showing a trend of massively diminishing returns after Year 3 in fracked mines. The IEA later showed the overestimates of potential to be as high as 80%. A year later, pro-fracking bantamweight Dan Hannan blocked me after this piece took him apart.

But those of us who always thought fracking was at best hype and at worst a Ponzi scheme have been proved right. Companies like Chesapeake nagged the SEC for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects. Now the bottom has fallen out of groundless claims.
Call me cynical, but I’m now wondering at which point some joker will use the massively reduced estimates of potential to say the black gold is more finite (and thus more valuable) than we thought. Nothing surprises me any more.

 

And so the game rumbles on: more data out yesterday showed UK growth forecasts being revised downwards again, and losses made on margin calls in the commodity sector continued to peak. Asian stocks slipped on Thursday as weak oil prices continued to feed global growth worries (so much for the ZH surge), and the sheer size of dollar denominated Bric debt continues to be ignored by the US Fed. Another side-effect of raising rates for the first time in a decades is that those who borrow to buy shares could get a nasty surprise. They have favoured US multinationals using QE and ZIRP to pump surreal profits back to the shareholders. But with no sign of an end to global downturn and rising rates, CEOs are likely to be more parsimonious. More people in over their heads. Doncha love it?

But when it comes to the Fed raising rates, as ever Ambrose Evans-Pritchard is unimpressed by the harbingers of doom:
‘ Emerging markets have already endured a dollar shock. The currency has risen 20pc since July 2014 in expectation of this moment, based on the Fed’s trade-weighted “broad” dollar index. The tightening of dollar liquidity is what caused a global manufacturing recession and an emerging market crash earlier this year, made worse by China’s fiscal cliff in January and its erratic, stop-start, efforts to wind down a $26 trillion credit boom. The shake-out has been painful: hopefully the dollar effect is largely behind us.’
Um, if the Fed raises rates, more investors will get on board USS Debtkeel, and so the Buck will rise further. So why should the Dollar effect be behind us? Oh well, Ambrose sees a bigger danger in China….the country he was telling us three weeks ago was about to confound everyone to take advantage of the growth in money supply. But now, he says, we should worry already:
‘The greater risk for the world over coming months is that China stops trying to hold the line against devaluation, and sends a wave of corrosive deflation through the global economy…. Lest we forget, China’s fixed capital investment has reached $5 trillion a year, as much as in North America and Europe combined. The excess capacity is cosmic. Pressures on China are clearly building up. Capital outflows reached a record $113bn in November. Capital Economics says the central bank (PBOC) probably burned through $57bn of foreign reserves that month defending the yuan peg.’

And let’s not forget the as yet unaudited billions thrown directly at falling share values on the Shanghai and other exchanges in the People’s Republic. I will stick my neck out here: I think the real figures show that the CPR is already in deflation, and exports are falling off a cliff with debt millstones attached. But only the senior echelons of the PBOC and the Politburo have seen them.
Everywhere now, there is the frosted glass behind which there are shadows that could mean doom or shelter – nobody knows. But there is a fault in the glass: one day soon it will shatter, and then the shockwave will be horrific.

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24 thoughts on “When the economy is in the deep midwinter, frosted glass renders everyone myopic

  1. Maximum opacity to obscure the veracity – they have the capacity and the mendacity to test our tenacity, but it’s all lunacy.

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  2. The break-even cost of fracking is in the region of $70/ barrel. So at present it is not a viable business to produce, but possibly to explore and leave in the ground as a future speculation.
    The out of the ground cost of a barrel of oil in the Saudi and Kuwait deserts is $1.82, so no contest at present,The Saudis can drive the oil price all the way down and wipe out any competition , but will have State budgetary problems soon at $40/barrel.
    There are no easy oilfields left. Either harsh environment Arctic fields or ultra deepwater to 12000 ft.
    Drilling costs for these dynamically positioned rigs are up to $1million /day, this includes logistic support. Production from these fields requires a minimum of $70/barrel break-even, because of the technical/engineering challenges involved..
    The offshore drilling and onshore fracking industries have collapsed with rig utilisation at 60% and thousands of oilmen out of work.
    The problem at present is oil storage, with the Gulf of Mexico and other anchorages choked with full tankers and nowhere to discharge because of the glut of overproduction.

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  3. http://www.businessinsider.com/r-bp-says-taking-more-oil-from-iraq-as-payment-2015-4?IR=T Some will say this is just another asset swap,but it isn’t,BP get the oil & the money from selling it without passing on a single penny to Iraq,how are the Iraqis going to service there next payment more oil! but how are they going to get that oil out of the ground if they can’t pay the workers, slavery! whipping! terrorising workers,well it can’t be food or other goods since bp actions have resulted in them not being able to transfer any assets they may have for other goods,other than bartering them for those other goods,Money is worthless everywhere,when i first started following you John to one of your article i said money was a long way from being worthless but it was coming,well it has arrived,helicopter money in Finland to re-establish some value & the talk of cashless society to stop sudo coins & other methods of payment taking over from money! & the end of car boot sales & loss of income for land owners who need that income,everything they do to uphold their failed ideology on speeds up it’s demise!

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  4. “The problem at present is oil storage, with the Gulf of Mexico and other anchorages choked with full tankers and nowhere to discharge because of the glut of overproduction.”

    Now I didn’t know that. Have you read of William Engdahl at Global Research salfordlad? It seems the Russians mastered deep drilling for oil whereas “our side” in their infinte, rather finite wisdom, chose a different technology which doesn’t exist in the West. According to Western extraction methods we are indeed at peak oil, but if we had Russian technology for deep drillling theoretically oil exists everywhere according tot he abiotic theory of oil formation.

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  5. Framing the oil industry as it is today, in terms of $/barrel is not too clever, given that the idea of $/£/euro is whatever they choose it to be.
    Storage, however, is a completely different concept entirely.
    Storage is the line, drawn in the sand and in the bay, that is now chock full of oil tankers.
    Supply will become skewed, as the means of distribution is tied up.
    It didn’t just happen. This is being done deliberately, come what may.

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  6. For motorists it is really not alot of difference, the price you are paying for fuel has large overheads for the outlet or government taxation so even with the current price collapse it struggles to fall further and the under a £1 a litre concept the RAC came out with.

    Saudi against Texas oil producers, can be in anything but in a collapsing economy the goal is put your debts onto another and if you can take 100% of the market the others are bust faster. Another interesting ploy is when two electronic component distributors through a buyout consolidate their market share under falling demand. This is where the protracted period of time since the bailout of the economy has allowed government / debt to slowly move the debt onto the population. Finding it harder and harder to earn enough to cover bills? Not surprised…

    As for AEP and dollar shock, it ain’t happened yet just wait till Yellen raises rates …

    Over the coming months I expect to see more and more weird legislation, forcing people to purchase stuff they do not need just to keep the big corporations going.

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  7. OPEC announced that its ‘pump and flood’ game of vicious circles would continue, almost saying overtly at one point that they had deeper pockets than Texas

    And all the time, the intended target is Russia. The US can print money to keep its economy turning over, Russia cannot, what with Western-driven currency markets and interest rates. The intended result is a collapsed Russia, again at the direct mercy of the West (and NOT Germany!).

    I pointed in vain at historical experience showing a trend of massively diminishing returns after Year 3 in fracked mines. The IEA later showed the overestimates of potential to be as high as 80%

    But taking this further, the US is hardly doing themselves any good. If, as you say, the fracked wells produce far less than expected after three years, then US forecasting is pointing in the wrong direction. Whilst Americans love forecasts that tell them what they want, reality is not always as kind. Thus, their expectations of weathering this low-oil-price storm may well be misplaced, and the US economy does not have the genuine wealth that underpins the Russian. Neither of them have anything by way of a serious industrial base, so they will both be beggared through the stupidity of American thinking.

    And, as Jeremy Stocks points out, the Russians aren’t stupid and have developed world-beating technologies before (just think of the Russian space-rocket engines that put the American designs out to grass). The Western media may make Putin out to be a cruel, heartless henchman, but the man has brains, whatever his provenance.

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  8. If you do not play by the Hegemon rules, you are attacked, demonised, villified ,by the compliant MSM.
    If that does not work there are a myriad dirty tricks to unseat/remove the target, assassination being the ultimate weapon.
    Many similarities between Putin and Corbyns treatment by the MSM.
    Sure sign that they offer an alternative dialogue and are a danger to the status quo.

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  9. The stockpiling i think is has much the fact that they expect oil production to be disrupted probably by war but just maybe by a financial crash,certainly the laying off of thousands of well paid jobs is going to hit governments around the world wanting to pay down debt & in war tanks,tankers & refineries are large & easy targets

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  10. Hieronimusb
    December 10, 2015 at 12:01 pm
    “Maximum opacity to obscure the veracity – they have the capacity and the mendacity to test our tenacity, but it’s all lunacy.”
    Got to be the best quip this year

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  11. Is it ‘myopic’ to notice that the collapse in oil and metal prices provides a huge boost to incomes of the population of northern hemisphere democracies? A long bull market started in 1982….

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  12. “Frosted Glass to top-off all the “Smoke & Mirrors”… It seems like levitation of “The Market” using only the power of belief & concentrated lack of thought, has failed us. I can already hear the voices of the high priests of banking intoning to what remains of the population “We will learn lessons from this, going forward…”

    Infinite fiscal growth, for an exponentially growing population on a finite planet… Hmmm let me see… Not with Capitalism… That’s just like “Pyramid Selling” But with peoples lives, instead of there money.

    “The Emperors New Cloths” spring to mind…

    KISS.

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  13. “Many similarities between Putin and Corbyns treatment by the MSM.
    Sure sign that they offer an alternative dialogue and are a danger to the status quo.”

    Yes but why oh why does everyone knock the Status Quo? They were a great band:

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  14. When you got lots of fiat paper money, which is in danger of becoming only good for hanging on a nail in the outdoor Kazi, why not buy tanker loads of oil and sit on it, eventually it will find a buyer at a profitable price.
    If Bilal Erdogan is the seller you get a good discount ,down to $10/barrel.
    The City of London will of course facilitate the transaction,no such thing as dirty money in the Square Mile.

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  15. Certainly, China seems to be the elephant in the room. Rampant overcapacity and huge debt is not getting any better, and when a few more people have access to the real numbers, all hell will let loose. They just cannot give it away now.
    Cash is KING.

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  16. I don’t pay any attention to AEP, he is just trotting out what ever his masters want him to at any given time.
    They do all seem to be playing a dangerous game without heed to the consequences should an ‘unplanned event’ occur. I read the other day that another 1M jobs are going in the US soon with the robotisation of many warehouses, add that to the losses coming in the fast food industry, and soon driverless cars, unemployment is going to surge upward dramatically in the next year or so. What are they going to do with all the unemployed? Most of them heavily armed too, I wonder what the US really has in mind with it’s ‘Foreign Policy’? What’s the point of the gas/oil pipeline through Syria if there’s no one who wants/needs it? A JW pointed out when I suggested that Russia would benefit from the huge find they announced recently, irrelevant if nobody wants oil.
    Saudi Arabia is the one to watch I think.

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  17. We are doing our part over here. Our daughter just returned yesterday from the UK having been wined and dined by one of your Manufactures. Her treatment seem somewhat over the top until she found out that she was their biggest customer.

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  18. Great piece John.

    The “economic experts” at the good ole BBC are continuing to push the meme that growth is slowing and deflaltion/slump looming because consumers are delaying purchasing decisions in the expectation that their objects of desire will be cheaper next month/year etc. These idiots assume that the mass of the population are sitting on pots of cash.

    The reality is that most of generation rent are already living from hand to mouth and finding it more and more difficult to keep up with ever rising rents (see the flood of in- work youngsters returning to live with parents). They cannot take on more debt as they are already maxed out. This is the result of nearly forty years of downward pressure on the incomes of working people including those who think of themselves as middle class.

    I seem to remember that in the 1920’s Henry Ford gave his workers a raise when all the other Tycoons were cutting wages to increase the bottom line. When asked why he did it Ford replied that he would like his workers to be able to afford his products.

    It is time to revisit Land Value Tax (Georgism) and the Social Credit proposals of CH Douglass. The present system is broken and I fear for my children and grandchildren.

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  19. There are other oil fields in the region however. Evidence from some quarters suggests ISIS is the Saudi army, and busy capturing the Libyan and Syrian oils fields. (Baring in mind that truth is the first casualty of war.) If so, the West is hoist by it’s own petard – BFF’s of the House Of Saud, and for the benefit of the audiences back home, fighting the fight, slowly and unsuccessfully, against “Daesh / Isil / IS Terrorism” aka Wahhabism with guns. What a cess pit.

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  20. Waldgaenger

    Having just weighed off my in-work 25 y.o. daughter to the tune of £4k, yes the violins, in relation to an unavoidable move of rented accommodation in East London, I wholeheartedly agree with what you say. Our species needs to find a different measure of self-worth, consuming by way of debt doesn’t seem to be cutting it. The idea that people, other than a few who perversely believe that their pay is either justified or sustainable, are doing anything except treading water precariously merely reaches for another new level of absurdity. It isn’t entirely clear just who’s side the BBC is on but it is certainly not the side of objective reporting and that’s a fact.

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