Markets …


Analysts and managers discuss credit problems in the Eurozone. They pretend/hope the economies are fixed and that growth will start soon. The same analysts and managers discuss crude oil prices and make excuses. There is no chance of the managers connecting the credit problems-crude oil dots. The blame for crude prices is fixed on central banks, the same central banks that have presumably ‘solved’ the European economic problems.

It may be that the recent petroleum mini-spike is starting to wind down. There have been a series of these small spikes then retreats since the ‘Big One’ in 2008. The premise here is that prices rise due to supply constraints then fall as the customers sit on their wallets … or go out of business. Unlike the ‘Brand X’ analysts, it says here the tie that binds economies to oil prices is the bank, not the gas pump.

 

 

Figure 1: Brent crude front month by way of TFC Charts: The market is really at a crossroads, here. If funds can be found to push the price higher, it would signal a trend change. Right now, the current spike has not exceeded last year’s high price of $128/barrel. It may never arrive: most of the world is facing financial difficulty … broke!

A trend change would indicate new credit/more credit. What is the collateral, the crude itself or the instrument by which it is destroyed? Where is the capital? The central banks can push out credit but their expanding balance sheets correspond to shrinking balance sheets elsewhere. The banks cannot create new capital only additional claims against what meager capital remains. New credit emerges from impaired banking. Smaller banks are either careful and unwilling to make risky investments or are capital constrained which is a reason why they are small. There are few endeavors that are investment-worthy: certainly nothing that wastes as the costs are too high at today’s prices. Waste-cost-revulsion is a simple dynamic but has overtaken the world’s economies. Central banks and governments cannot induce businesses to lose money which is what waste does today.

The price in euros is higher today than it was in 2008: the 2013 euro futures contract is the same price as the current month, how could it be otherwise? Would anyone hold euros if the currency futures were in backwardation?

 

 

Figure 2: Crude priced in euros: ‘It’s a Boy!’. Chart by EIA: the oil producers seem to have differing opinions about the euro and the dollar. this may reflect oil producers’ opinion on what the euro is worth today compared to what it might be (or not) worth tomorrow. Whether or how they might be hedging is impossible to say: this would effect the current price in euros to some degree. There has to be some realization that the risk of a vanishing euro is more than insignificant.

The oil producers might be simply charging the Europeans more for their oil than they are charging Americans.

A purpose for the euro was to give ordinary Europeans (Greeks, Spanish, etc.) an organic, hard currency alternative to the dollar. It gave them brain-damage instead: with either a euro shortage or a potential defunct euro, the crude market is poised to take a massive hit. If the euro fails, much of Europe’s bid will simply vanish. Survivors with little to sell will have to buy dollars in brutal currency markets. With Irving Fisher-esque intentional debt-deflation currently underway, the outcome is European states having to rent euros in brutal credit markets.

This becomes a distinction without difference: there will either be no more euros at all or too few euros in circulation except within banking. This potential absence may be why crude markets are looking soft. As with the other mini-spikes, the declines that follow are signs of demand unraveling and bankruptcies rather than increased petroleum supply pushing prices down.

Despite the deflation the flood of euros into crude is obvious. It may be that China is swapping its euro cache for crude. The worst-case scenario for China would be for its banks to be caught holding hundreds of billions of worthless euros. What we may be seeing is ‘currency hot potato’ with China trying to exit a massive currency position, dumping euros at a discount. China would put oil into strategic reserves just as it stockpiles copper and zinc. The China-euro dumping would explain the price push we have seen. The Chinese are careful: too much euro dumping would be suggestive of a dead euro. China can’t buy enough crude to make up for the loss of European crude customers and precipitating a run out of euros would be self-defeating. A slowdown in euro sales may be what we are seeing reflected in the softening price.

How many euros does the Federal Reserve hold as a consequence of its ongoing swap operations? Probably a lot but not enough to move any of the markets. The US isn’t buying crude with euros. It is hard to say what the US refiners are ‘buying’ with the Brent/WTI spread at nearly $20 per barrel.

 

 

Figure 3: Silver has been extremely volatile, it has also exhibited some ‘bubble’ characteristics. Keep in mind, in debtonomics there are no such things as bubbles, only periods when credit expands faster or slower along with short periods of credit shrinkage. Asset prices follow credit availability so price increases depend on whether the finance sector believes silver is a good hedge against something or other.

Silver was hammered by selling as industrial users’ customers sat out the market and monetary longs were faced with margin calls. A credit shrinkage scenario following a petroleum price decline/crash would have silver near $20 an ounce.

Silver will be worth something because it is ‘portable wealth’ that does not rot, burn or crinkle. Silver-the-metal is resistant to ‘computer error’. It is hard to see silver at $50 again any time soon. More likely are margin calls and bank failures in countries as the euro unravels even as citizens rush buy physical silver as a hedge against … euro unraveling. If/when the euro turns to dust, there will be a myriad of currencies arising to take its place. First among them will be the national currencies as well as the dollar. Second will be various local currencies, scrip and older silver and base-metal coins. Unofficial exchanges will emerge with rates for the coins based on metal content.

To provide the illusion of ‘stability’ there might be gold backing of national currencies but this is likely to be a form of public relations. That is, any convertibility will be strictly limited. It is far more likely that the new currencies will be wildly inflationary: existing external euro debts will be repudiated (see ‘Greece’). Internal euro debts will be re-denominated into the new currencies then repaid (overnight?) with newly issued national currencies. The aim will be to cram down debts to a manageable level (zero). There will also be float problems. Countries won’t have enough currency in circulation because citizens will be buying hard currency such as the dollar with the national varieties. This trade will take place in black markets: the hard currencies will be in increasing demand. The worth of the new currencies will decline accordingly as issuers put more new bills onto the streets.

Forget about credit, the only source of credit will be citizens who will have just been robbed and the IMF. The only banks to survive will be those that have good relationships with both depositors and borrowers. With currency upheaval even the best-managed banks may find themselves without the tools to work with.

European nations will counterfeit their neighbors’ currencies. The combination of currency arbitrage and the absence of restraint will generate massive amounts of inflation. Europe is likely to experience a lawless period. The establishment has failed and left a gaping leadership gap, it’s also a criminal enterprise. There will have to be a reckoning from which a new establishment to emerge. The outcome will be a conservation economy whether it is desired or not. Couple the lack of useful or worthwhile currencies, the shortage of ‘hard’ currencies and an accompanying desire to hoard them, low producer prices will ‘shut in’ crude at the wellhead. There will be shortages. Instead of rationing fuel by way of credit, the fuel will be physically rationed, instead.

From this time forward the important outcome to be aware of is any oil consumption ‘problems’ with credit or foreign exchange will ricochet through the economy to remove support for new petroleum prices and supply. What supports prices supports the means to meet them.

The European management has been able to white-wash the Greek collapse and pretend business as usual. Absent from the discussion is energy constraints and Peak Oil, the other Mediterranean nations are quavering, there will be no hiding the truth.

NOTE: Massive contretemps online between Paul Krugman, Randall Wray, Steve Keen and Scott Fullwiler. The argument started with a bit of bloggy nonsense from Krugman about Hyman Minsky. This led to Krugman’s description of banking and creation of assets/loans … a description of lending that made sense in the 1800s. This fits into our ongoing discussion over here @ Debtonomics. Links are here or can be found at Fullwiler’s article.

The economists really don’t have a clue. Not one mention of peak oil anywhere …

23 thoughts on “Markets …

  1. enicar333

    “Iran’s decision to bar Hellenic Petroleum and Motor Oil Hellas from purchasing Iranian crude came after they defaulted on their purchases from Tehran.

    The interruption of oil flow from Iran is expected to further deepen the financial crisis in Greece.

    Oil prices have shot up in recent months in the wake of Iran’s decision to halt its crude exports to certain European countries in response to the European Union (EU) oil embargo on Tehran.

    Iran has already cut oil exports to France and Britain in retaliation for the Western-led sanctions imposed on its oil industry.”

    How could it be any different?

    Would Iran be willing to accept Drachma?

  2. The Dork of Cork

    Fascinating tram maps Steve – they seem to cover prettying much everything.

    My Lilliputian city also had a extensive tram system for its size but also a local narrow gauge train system extending out 15 /20 miles or so.
    spellerweb.net/rhindex/Ireland/GreatSouthern/Muskerry.html

    Much of the Blackrock to passage railway line is still intact and could be used for a tram train operation – but alas the city planners had little vision.
    http://www.geograph.ie/photo/1856275

  3. steve from virginia Post author

    The good old days:

    http://www.youtube.com/watch?v=4MoNyzmWz_Y

    Tramfret:

    http://energy-cities.eu/Paris-experiments-TramFret

    Streetcars in downtown Philadelphia in 1954:

    http://www.phillytrolley.org/trackmap/images/1954_ptc_map_e2.jpg

    This is one section of a multi-section map of the entire city. Compare to ‘new’ street railway lines and see other trolley tidbits here:

    http://www.phillytrolley.org/

    If some company started manufacturing PCC cars again, they would make a fortune.

  4. enicar333

    “Not one mention of peak oil anywhere …”

    T. Boone Pickens: Fracking safe, oil prices heading up

    Oil prices, though, are headed up, he said. Saudi Arabia is running out of oil and needs to keep prices high, he said. And with supply capped, prices are the only way to control demand.

    “I think oil prices will go up substantially,” he said, targeting summer for the biggest increase.

    Meanwhile, he replied to one question about natural gas prices that it’ll take time, but they’ll head up again. One prediction said prices wouldn’t get to $6 per thousand cubic feet until 2025. They’re at $2.20 now. But Pickens expects them to reach $6 by 2015. He bases that partly on the much higher prices for natural gas in China and Japan.”

    Meanwhile… Life is good in the Heartland.

    Auto industry set for best month in 5 years

    “The U.S. auto industry is taking its foot off the brake pedal. March vehicle sales are expected to jump 14 percent from the previous year and account for the highest total since August, 2007, according to a Forbes article.”

    And the Banksters are going to be raking in the dough this Fall.

    Banks set to harvest new business with farm loans
    American farmers had a good year overall in 2011, with strong farm income for the year and a rebound in farmland value. That growth in the agricutural industry also helped boost banks, particularly those rural farm banks that do the majority of the lending to the country’s farmers, according to a new report by the American Bankers Association…

    “The growth in farm loans shows banks continue to meet the credit needs of both large and small farms and remain the most important supplier of agricultural credit,” said John Blanchfield, senior vice president and director of ABA’s Center for Agricultural & Rural Banking.”

    ENJOY the Summer – if we don’t have riots and race wars – which the media certainly seems to be trying to whip up – for we will all get to starve/freeze to death this coming Winter.

    IN another interesting note, which I know I’ve seen RE refer to, I see this item on YAHOO today:

    Interest in 1940 US census paralyzes website
    “NEW YORK (AP) — Interest in the newly released 1940 U.S. census is so great that the government website with the information was nearly paralyzed shortly after the records became available to the public for the first time.
    The government released the records for the first time after 72 years of confidentiality expired.”

    Are people looking for evidence of this? “In American history there exists another crime committed by the government against its own people. This crime is the Great American Holodomor of 1932/33, which resulted in the deaths of millions of US citizens.”

    1. Reverse Engineer

      Wow! Interesting that this is making its way out into the MSM through Yahoo.

      As I mentioned preivously, after reading some of the material put forth by Boris Borisov in 2008 published by Russia Today, I tied to verify some of these statistics. Between the Census, the Federal Reserve kept records also each year. They were CLEARLY altered/deleted for the years from 1932-1934.

      It is without doubt that MANY people here int he FSofA died of Starvation or starvation related compications due to compromised immune systems and disease during this period. The exact numbers cannot be determined, and never will be because they are mixed itno brith deat ratios and immigration etc. Without ALL the stats, you cannot fix the number. However, a conservative estimate definitely is in the Millions.

      Chump change of course for this next go round. We will see AT LEAST anorder of magnitude difference, perhaps 2 or even 3. Overshoot problem now is much worse, and the system is much more dependent on JIT. We can only hope Da Goobermint can put in place a Fascist or Communist Solution that keeps it within some bounds. In the absence of that, we could get 99% die off in a very short timespan.

      RE

  5. The Dork of Cork

    Nothing encapsulates more the frugality of Germany and the hope we buy more cars that never in the history of automobiles (except wars) payed for themselves then the Volkswagen cargo tram.

    Its a sick system.
    They save petrol in the hope we burn it and turn it into German deposits.
    http://www.youtube.com/watch?v=fRKTTC6MYIw

    There is really no core capital created when you look at the European system on a holistic level.
    Ducks – we are fat overfed ducks.
    The farmers get really upset when we want to walk around a bit instead of stuffing our bills full of grot.

    1. steve from virginia Post author

      It’s hard to stomach.

      Dodge Viper … why did the taxpayers bail out that company, again?

      Biggest sales are the trucks, too.

    1. jb

      Thanks for the chart Josh. Not that I disagree, but what makes 1.20 the tipping point?

      The Euro is up, the dollar down.
      The dollar is up, the Euro is down.

      Can’t TPTB manage (ahem) this situation so that neither currency reaches a ‘tipping point?’ Just curious.

      Jb

    1. rcg1950

      The future has arrived in Egypt and is headed everywhere much faster than anyone is prepared for. Very scary. Thanks for the link.

    2. Reverse Engineer

      Awesome find on this video Jb! Coming Soon to a Gas Station near you also!

      Anyhow, this answers the question of why so far no Shortage here in the FSofA, Egypt, Greece et al are getting Triaged out of Oil access first and the remaining supply is redirected to economies with still functioning credit markets. Wait until these Gas Lines make it to Italy and Spain! Then the fun really begins!

      It is of course remarkable how truly clueless most people are, some of the quotes from this video are just priceless.

      RE

      1. enicar333

        Looks like the FUN has begun.

        “Police were called to a petrol station in East Barnet on Saturday, following allegations of a row.

        Officers were called at 8.45pm and told that an argument had broken out between two adults over someone cutting into the petrol queue at the station in East Barnet Road.

        It is claimed that someone threw a bucket of water over another motorist and the empty bucket was then tossed around.

        When police arrived, the pair involved decided not to make any formal allegations.”

        Here is another interesting item –

        A hosepipe ban will be introduced in Barnet this week.

        Following a widespread drought affecting the South East of England, Veolia Water has banned its customers from using a hosepipe from Friday, April 5 until July.

        Anyone who ignores the ban could face a fine of up to £1,000.

      2. Reverse Engineer

        All because of “Panic Buying” and a threatenned Strike! Right.

        Hello. They don’t have enough Gas for all the customers!

        Somebody gotta start plotting these stories on a Map. You could make a real nice Interative I am sure and get a good handle on how the Triage is being undertaken.

        RE
        http://www.doomsteaddiner.org

  6. Reverse Engineer

    “There is no chance of the managers connecting the credit problems-crude oil dots. The blame for crude prices is fixed on central banks, the same central banks that have presumably ‘solved’ the European economic problems. “-Steve

    I find it very difficult to believe that the folks running this show cannot connect Dots that you and I can connect. I mean really, we are both smart guys and all, but are 1000s of managers and Ph.D. economistas really that clueless/deluded?

    Blame fixation is done for Media Purposes and to shift political discussion away from the real problem, but the real problem I think is well understood by the Illuminati running the show. They know the system is behind the Eight Ball and they play Ignorant because to do otherwise is to crash the whole show before they exit with as much wealth as they can steal here.

    The main question here I see is just how long is it that increasing liquidity between TBTF Banks can mask overall insolvency and how deep the collapse of the Main Street economy can go before the Political Class gets tarred and feathered and ridden out of town on a rail? Its already gone on a lot longer than I thought it ever could possibly be extended out. Blogger Wisdom had it that Greece would precipitate Lehman 2.0, yet so far it has not. So we have to wait for Spain to see if that is sufficient to drop the hammer down?

    When does real shortage begin to be apparent? I’m paying $4.35/gal now for gas, higher than the peak I payed in 2008 of around $4.25/gal. How long can the economy function at that level before it breaks again? There are more long term UE now, more people dropped off the stats as not part of the workforce. Who is out there to pay these prices? The 1%? They just can’t drive enough moles to make up the consumption difference.

    When does it terminally break? What is the Tipping Point for this House of Cards?

    RE

    1. Mr. Roboto

      That’s a really good question. My own personal belief is that the Spirit is allowing “extend-and-pretend” to go on as long as it has so that individual people can arrive at a culmination-point in their life-journey that might not be possible in a full-blown collapse-scenario. One area where I disagree with the Archdruid is that those who are waiting for a main collapse-event are like Linus waiting for The Great Pumpkin. 2008 came very close to being that event, so if it happened before, it can certainly happen again.

      1. jb

        It just so happens that I pulled out my copy of ‘The Ecotechnic Future’ this morning to re-read his thoughts on global climate change (pages 50-54).

        I also disagree with Mr. Greer’s ‘Great Pumpkin Theory.’ If anything, we as individuals should be moving urgently in this direction anyway. Although I think he is right – several generations will experience the fall of western industrial civilization, I think the second step on this stair case (the first being 2008) is a doozie. Steve said quite adequately:

        “What supports prices(,) supports the means to meet them.”

        Watch the Real News clip I linked below and consider the consequences.

        Jb

    2. Mr. Roboto

      And it’s not really suprising that the collapse of Ireland or Greece hasn’t been the Tipping Point event. These were the European Common Market’s (the predecessor of the Eurozone) most poor and marginal nations, so it probably wasn’t terribly difficult to erect firewalls around the economic carnage in these countries. Portugal, Spain, or certainly Italy would be another matter entirely….

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