Taking a Well – Deserved Break …


As you’ve probably noticed, I’m in the middle of a break. I need to recharge my batteries, and figure out where to go from here. I’ll probably start writing that (damned) book that I’ve struggled on-and-off with since 2009.

In the meantime, we are certainly at the point where the old regime has lost much of its credibility (credit, too); the next great crisis has begun to emerge. While it is far from ripening, every day brings industrial denouement forward by one more day: last year’s oil price decline is little different from decline of real estate prices beginning in the mid- 2000s. The cause is- was the same, debt-driven asset side mispricing. The outcome is going to be the same as with real estate: there will be deleveraging amplified by derivatives; margin calls, extreme volatility, cash/credit crunch and self-amplifying doom-loop = pleas for a bailout:

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Figure 1: Commercial real estate prices by year from MIT Center for Real Estate/Real Capital Analytics; (click for big). Any bailout would be devoid of substance: the government must borrow from the same banks it intends to save, there are no other but ruined banks to borrow from! If nothing else … this is our crisis!

Can the government bail out the auto industry including fuel supply and the rest? I don’t know. Time will tell: there is an old baseball remark: “that’s why they play the games,” the outcomes cannot be worked out on paper. We won’t learn the result of our current great game until it’s done; at that point our businesses and distractions may be done as well, with one being the indicator of the other.

Of course, commercial real estate was (wildly) overpriced but not completely worthless; this kernel of worth meant the ultimate survival of the industry. The question is: what can be said about the petroleum extraction-to-waste enterprise? Is it completely worthless? The markets are speaking, it’s best to listen to them; under their breath they are murmuring ‘worthless’, ‘worthless, worthless’. It isn’t just the increase in overall debt that offers diminished returns but also the ongoing increase in extracted petroleum liquids. Fuel ‘use’ is constantly advertized as ‘productive’ … this turns out not to be the case.

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WTI futures monthly chart by TFC Charts (click for big). As in real estate, the players are desperate to push prices back above $110/barrel so that they can use their companies as collateral for more loans. However, the customers have nothing to offer as collateral other than ‘hope’ … they can never hope to borrow enough to retire the drillers’ loans at pretty much any price!

Of course, the comment section(s) are open, enjoy yrselves!