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.