Black Swan

The consequences of all this will be felt all over the world, and for a long time to come. All of our economic systems run on oil, so many jobs are related to it, so many ‘fields’ in the economy, and no, things won’t get easier when oil is at $20 or $10, it’ll be a disaster of biblical proportions, like a swarm of locusts that leaves precious little behind. Squeeze oil and you squeeze the entire economic system. That’s what all the ‘low oil prices are great for the economy’ analysts missed (many still do). Entire nations will undergo drastic changes in leadership and prosperity.

“Following technical and operational investigations and in interaction with relevant political and national security bodies of the country and after it became clear that the US combat vessels’ illegal entry into the Islamic Republic of Iran’s waters was the result of an unpurpuseful [sic] action and a mistake and after they extended an apology, the decision was made to release them."

As the towering forces that are prevailing against failing global economic architecture and the pit of debt beneath that structure, as laid out below, it is clear that the 'Epocalypse' - encompassing the roots "economic, epoch, collapse" and "apocalypse" - is here, and it is everywhere. The Great Collapse has already begun. What follows are the megatrends that will increasingly gang up in the first part of 2016 to stomp the deeply flawed global economy down into its own hole of debt.

The Real Economy Is Depressed-er

“Are they really going to create their own tax authority and other state structures? Ignore the rhetoric and declarations, follow the actions.”

"The burn rate has been worrying. It’s not about how long it gets to zero, its about how long it gets to about 2, which is what they need."

Earlier today everything changed when Saudi Arabia's unveiled what may be a stunning Hail Mary: one which is great news for the suddenly liquidity challenged Saudi government, and is very bad news for the future price of oil. According to the Economist, Saudi Arabia is contemplating taking Saudi Aramco - arguably the world's most valuable company - public. Here are the implications.

Many of us are wishing to be bold, and maybe even revolutionary.  But we are far too comfortable, and also too afraid. 

On the heels of a tumultuous weekend that saw Saudi Arabia cut diplomatic ties with Iran after the Saudi embassy was torched by protesters angry at the execution of a prominent Shiite cleric, CDS spreads for the kingdom have blown out to six-year wides while the implied odds of the riyal peg finally breaking are hitting new record highs.

What began with the execution of a prominent Shiite cleric in Saudi Arabia has devolved into a full blown sectarian showdown with Bahrain cutting diplomatic ties with Iran, the UAE recalling its ambassador, Sudan expelling the Iranian mission, and Iraqi Shiites attacking Sunni mosques. In short: tinder box meet spark.

Though "another Lehman Brothers" isn't likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices.

Following yesterday's budget (deficit) and the 'sacrifice-the-people's-comfort-for-the-death-of-US-Shale' plan that we detailed here, it appears market concerns about Saudi Arabia's forward-looking health are rising. As Bloomberg reports, USDSAR 12-month forwards jumped 250pts (the most since December 2007) to 725bps (the highest level since March 1999) implying expectations of a looming de-pegged, devaluation. Perhaps just as worrying is this is the same pattern that played out in August as Yuan weakness sparked HIBOR stress, leading to SAR forward weakness and then US equity market collapse.

In a bid to shore up its finances in the face of self-inflicted oil wounds, Saudi Arabia is shaking up the welfare state by raising prices on everything from domestic fuel to water. Apparently, persisting in the war of attrition against the US shale complex is paramount - even if it means making life harder for everyday Saudis so the monarchy can buy itself some budget breathing room.

Back in August, angry investors captured Shan Jiuliang, the head of Fanya Metals Exchange, in a daring predawn raid on a luxury hotel in Shanghai. The citizen's arrest came after Fanya stopped making payments on WMPs it issued. Now, it appears as though Shan has been captured again - only this time, it's not clear whether he'll be coming back.

“To the intelligent man or woman, life appears infinitely mysterious, but the stupid have an answer for everything.” ~Edward Abbey