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Occam's Oil

Tyler Durden's picture




 

Submitted by Jeffrey Snider via Alhambra Partners,

As my colleague Joe Calhoun continually reminds us, everything that happens has happened before. The ongoing “struggle” to define what is driving crude oil prices lower is perhaps another instance of a past “cycle” being reborn. With oil prices now heading much closer to the $40’s than the $60’s, consistent commentary is increasingly swept aside.

The move in crude these past six months is now nothing short of astounding. At about $52 current prices (which will probably move in either direction significantly by the time this is posted) the collapse from the recent peak now equals only past, significant global recessions under the oil regime that began in the mid-1980’s.

ABOOK Dec 2014 Crude Asian Flu

That comparison includes the 1997-98 Asian “flu” episode where the mainstream convention was also totally convinced of only massive oversupply defining price action. This was incorporated even into the International Energy Agency’s (IEA) estimates of oil inventories, as described shortly thereafter by certain incredulous oil observers:

Fourteen months have passed since the International Energy Agency’s oil analysts alerted the world to the mystery of the “missing barrels.” This new term referred to the discrepancy between the “well-documented” imbalance between supply and demand for oil and the lack of any stock build in the industrialized world’s petroleum supply. In April last year [1998], the IEA’s “missing supply” totaled only 170 million barrels. At the time, the IEA described this odd situation an “arithmetic mystery,” but assured us that these missing barrels would soon show up. As months passed by, stock revisions occasionally too place, but often in the wrong direction. Rather than shrink, the amount of “missing barrels” grew by epochal proportions.

 

By the publication date of the IEA’s April 1999 Oil Market Report, the unaccounted for crude needed to confirm the IEA’s extremely bearish views of massive oversupply of oil throughout 1997 and 1998 ballooned to an astonishing 647 million barrels of oil. Two months later, the IEA’s June report still presumes that 510 million barrels of oil is still “missing”, and the IEA has officially opined that it all resides in the un-traded storage facilities in the developing countries of the world.

As the author of that analysis points out in another piece, those “un-traded storage facilities” being blamed were sometimes ridiculous notions, such as “slow-steaming tankers”, South African coal mines or even Swedish salt domes. In other words, the idea that there was this massive oversupply of oil production driving the almost 60% collapse in global crude prices in 1997 and 1998 was total bunk. Instead, what was driving prices lower was the simple fact of supply and demand balancing to achieve a physical clearing price.

That meant, in the broader context far and away from Swedish salt domes, the price of oil was really trading on the collapse in global demand for it. The Asian “flu” was not simply a financial panic among “unimportant”, far-flung isolated economies of tiny nations, but rather a global slowdown across nearly every economy – to which sharply lower oil prices simply confirmed. Despite commentary of the dot-com bubble era, the US was not unaffected which is why Alan Greenspan’s FOMC cut the federal funds target rate from 5.5% to 4.75% between August and November 1998; a rather significant “stimulus.”

As if that was not enough of a parallel, there was also the “Saudi connection” then as now. Many respected observers put forth the notion, as they have in recent months, that the Saudis were behind the price collapse, or were using it to their advantage, seeking to squeeze out new producers. Back in the mid-1990’s that meant more expensive areas in Africa and new production capacity of the North Sea. The Economist published that idea in a March 1999 article titled, Drowning in Oil:

But low prices will gradually put most such areas out of business—especially if cash-strapped Gulf states conclude that the best way to increase revenues is to boost production, which could drive prices from today’s $10 to as little as $5 (see article). The world will then again depend on a few Middle Eastern countries for half its oil, up from a quarter now.

And so today, the Saudis are supposedly up to the same tricks, now trying to drive US shale production out of business. The fact that all those increased marginal suppliers more than survived the Asia flu tells you everything you need to know about this wild assertion of “intentional” Saudi action. It is a convoluted rumor that survives solely because it is convenient to those economists and commentators that refuse to accept these more basic connections.

That leaves us basically once more in the hands of Occam’s Razor, namely that oil prices are falling hard because demand is falling hard. The scale gives us insight into the nature of the slowing of the global economy, to which the US is a full part, meaning that comparisons only with past and serious downslopes is not a welcome development; nor should it be “unexpected.” Mainstream commentary seeks to reject this simple and basic argument because it cannot fathom, predicated on its penchant for nothing but parroting economic “authority”, that the world could fall so deeply into recession once more drowning not just in oil but also “stimulus.” Once you get past the idea that “stimulus” isn’t, logical sense is restored.

ABOOK Dec 2014 Crude Tax Cut

 

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Thu, 01/01/2015 - 13:18 | 5612360 -.-
-.-'s picture

Oil? That is something that Pala tried to instruct us on handling.

Thu, 01/01/2015 - 13:25 | 5612378 Bill the Cat
Bill the Cat's picture

Pfthwpt!

Thu, 01/01/2015 - 13:31 | 5612390 El Oregonian
El Oregonian's picture

But, but, but everything is ok, right? I mean those wise and all-knowing sages in the government and television talking heads told us so correct?...

 

 

sarc off//

Thu, 01/01/2015 - 13:39 | 5612421 KnuckleDragger-X
KnuckleDragger-X's picture

Peachy just peachy.....

Thu, 01/01/2015 - 15:04 | 5612632 SAT 800
SAT 800's picture

Well, Bill; I'd have to agree that analysis. Especially if you're referring to the Pfthwpt of anti-gold propaganda that we're bombarded with daily. According to RT, quoting Sadap Jeep, (sp?), the human beings in the world, (go human beings !), own 160,000 Tonnes of Gold; the Central Banks of the World, about 33,000 tonnes; which might explain why they keep buying this stuff; even though it's a "barbarous relic of a bygone age"; as one of our Princeton Eggheads has said. They wouldn't want us to have any power or wealth left after they finish the last act of the "Great Paper Play", now would they ? I don't think so; but tough titty. It looks like human beings 1 Centrals Banks 0 on the scoreboard; just keep stacking and don't listen to these fountains of wisdom that want to try and get the majority of this Gold before the great paper crash. Apparently they've already lost; which I find very amuzing.

Thu, 01/01/2015 - 16:54 | 5612951 LoneCapitalist
LoneCapitalist's picture

Where do Governments fit in there?

Thu, 01/01/2015 - 14:13 | 5612362 falak pema
falak pema's picture

the demise of the BRIC economic growth as collateral damage to 6 years of currency wars, QE and ZIRP; that has made the risk asset market totally head up ass; now has ominous bite back for these incendiary shamans.

Those who have decreed that debt is asset and return is without risk for the TBTF and its Oligarchy minions BUT conversely and inevitably with rip-off risk for the 99.9%.

The latter, yesterday's middle class of welfare construct, all being raped now by the NWO Oligarchy construct via their shills in high up places of State apparatus.

"You'll never be so rich as trickle down rich all thanks to Banker's creative invisible hand that neuters risk!"...Indeed! 

Wealth inequality and totalitarian constructs are a return to feudal times. 

Thu, 01/01/2015 - 14:39 | 5612575 LawsofPhysics
LawsofPhysics's picture

Risk? Counterparty Risk?, Collateral?  What are these things you speak of?  I don't see any reference to such things in modern finance.

Thu, 01/01/2015 - 13:26 | 5612380 Wahooo
Wahooo's picture

And what was the dollar doing during the Asian flu?

Thu, 01/01/2015 - 13:29 | 5612384 sessinpo
sessinpo's picture

Damnit. You're realling pissing me off Tyler. EKM1 told us all that price declines in oil would mean higher demand. sarc/

Thu, 01/01/2015 - 14:12 | 5612513 Sudden Debt
Sudden Debt's picture

The difference between 1998 and now is that since 2001 the International Petroleum Exchange was created and well... that created the ability to throw paper oil into the market and rig the prices and so we peaked to nearly 150 dollars where supply was sufficient for everybody.

So the drop in oil prices isn’t about international conflicts but rather done but certain banks that took the massive short positions.

It’s not just the comex that is rigged guys, everything is rigged.

And now that 2015 is here, contracts are renewed at lower prices and drillers are hedging to lower prices.

What do you think would happen if those banks would turn their trades in januari when everybody is short?

Let’s not forget that Chinese demand has gone up 15% and global gdp is up to 60 trillion this year up from 30 trillion in 2000. That means much more buying power and higher demand.

 

Thu, 01/01/2015 - 14:22 | 5612542 Escrava Isaura
Escrava Isaura's picture

 

 

Sudden Debt

Great point.

 

Thu, 01/01/2015 - 15:05 | 5612626 piratepiet
piratepiet's picture

What can I wish you for the new year ?  Rising oil prices ?

Thu, 01/01/2015 - 15:13 | 5612652 Eeyores Enigma
Eeyores Enigma's picture

Great point fer shur but...

Lets not go all "its all because of speculators" again.

Geology plays just as significant a roll if not more. Oil was bid up to make uneconomical oil available but whats economical for tight oil production is NOT economical for Global economy.

Welcome to Pee Coil Bitches!

P.S. I know you already know this but it is my job as internet monitor to point it out again and again. Now show me your pass.

Thu, 01/01/2015 - 14:42 | 5612578 maskone909
maskone909's picture

Boy am i happy we repealed glass steagal. I mean, how else would we enable our banks to gamble on the very essence of basic necessities of survival. Golly gee whizzz.

Yeah they said producers use the comex to hedge but who has te largest positions? Gs? Jpm? Hsbc? Last i checked they didnt drill shit

Thu, 01/01/2015 - 15:10 | 5612645 SAT 800
SAT 800's picture

I don't know about that. I wouldn't put it past some of them to be "drilling shit"; at least on the weekends.

Thu, 01/01/2015 - 16:11 | 5612805 MalteseFalcon
MalteseFalcon's picture

The derivatives "Markets" have absolutely nothing to do with improving economic performance.

This kind of "trading" allows the .01% to retain total control.  It is a dead weight loss to the economy.

These "trading" platforms should not just be closed, but criminalized.

Thu, 01/01/2015 - 17:13 | 5613009 Sudden Debt
Sudden Debt's picture

The banks OWN the petro trade!!

 

In May 2000, ICEwas founded by Sprecher and backed by Goldman Sachs, ... Credit Suisse, Deutsche Bank,JPMorgan, Merrill Lynch, Morgan Stanley and UBS).

Thu, 01/01/2015 - 17:40 | 5613069 post turtle saver
post turtle saver's picture

yep... keep pointing this out... make people google things like 'Davos' and 'ICE' and 'London loophole' and 'high speed round trip trade' and 'supply chain manipulation' and... well, you get the picture...

Thu, 01/01/2015 - 14:43 | 5612581 LawsofPhysics
LawsofPhysics's picture

Look, until those fusion reactors come online in earnest, oil remains the single most important source of consumable calories and commodity chemicals.  With 7+ billion people (and growing) all competing for a better quality of life there is plenty of demand.

Since oil is still the real driver behind the real economy, it is much like a reserve currency or real money itself.  Look at the long term trend.  The only thing that would break that is a genuine or legitmate alternative, period.

Thu, 01/01/2015 - 15:18 | 5612663 hairball48
hairball48's picture

Why is it that more people don't "get" that fact? That "oil/natural gas/energy" drive everything. And as real growth happens in these large countries, demand is not going down over the mid/long term.

All those new "eaters" in China, India and elsewhere want more and better food, more protein, more calories. LOTS of energy needed to produce all that new food.

And the same is true for all sorts of consumer goods.

The "real price" of energy is going up long term.

War could change that calculus though :)

Thu, 01/01/2015 - 16:23 | 5612852 MalteseFalcon
MalteseFalcon's picture

Speculation has held the price of oil well above its free market price for 40 years.  It would take many, many years of increasing demand for the market price to finally reach the phoney  manipulated price of 6 months ago.

So don't start in with billions and billions of Chinese and Indians driving the price of oil to $200 barrel.  It's not happening any time soon if ever.

Using oil for transportation is a mistake that is now going to be corrected with electric vehicles. This will dampen any rise in demand considerably.

Population growth is starting to level off as the 3rd world gets educated or sterilized (h/t Bill Gates), so long term demand increase is not in the cards either.

I can't imagine TPTB can keep fusion in the bag for another 75 years.

The age of oil is over and I hope you enjoyed it.

 

Thu, 01/01/2015 - 16:31 | 5612881 LawsofPhysics
LawsofPhysics's picture

Show us the data for the world population "leveling off".  It isn't.

 

After that, show me just one city that is supported entirely by a fusion reactor.

By the way, a tremendous amount of energy and commodity chemicals is still require simply to maintain the status quo.

Yes, we will stop using oil simply because the EROEI won't make it viable.

Thu, 01/01/2015 - 23:45 | 5613857 MalteseFalcon
MalteseFalcon's picture

I had to go all the way to Wikipedia to get this:

"In 2006, the United Nations stated that the rate of population growth was visibly diminishing due to the ongoing global demographic transition. If this trend continues, the rate of growth may diminish to zero by 2050, concurrent with a world population plateau of 9.2 billion.[102] However, this is only one of many estimates published by the UN; in 2009, UN population projections for 2050 ranged between around 8 billion and 10.5 billion. An alternative scenario is given by Jorgen Randers, who argues that traditional projections insufficiently take into account the downward impact of global urbanization on fertility. Randers' "most likely scenario" reveals a peak in the world population in the early 2040s at about 8.1 billion people, followed by decline."

There are no commercial fusion reactors at this point.  Is the technology suppressed?  Will fusion emerge in the next 50 years?  My opinion, which probably varies from your opinion, is 'yes'.  Place your bets.

Seems to me that we have a glut with the current status quo.  With decreasing demand that started in 2005, I expect that condition to remain permanently.

Renewables and other technology will result in oil being left in the ground.  It won't be needed.

Thu, 01/01/2015 - 17:54 | 5613095 Karlus
Karlus's picture

>>corrected with electric vehicles.


Long live Good King Musk!

/sarc

 

Dude, put the Kool-Aid down. The grid is powered with coal and the batteries on Tesla sucks. Model S runs on govt subsidies more than juice from an outlet

Try again

Thu, 01/01/2015 - 23:30 | 5613825 MalteseFalcon
MalteseFalcon's picture

Not Tesla or the Volt.  Toyota, Nissan, Kia, Volkswagen and others will be introducing electric models in 2015.

It is a reality, not a fantasy.

Fri, 01/02/2015 - 06:43 | 5614178 Obama LaForge
Obama LaForge's picture

Low oil prices and the fact that we aren't all dotcom millionaires are about to murder Tesla. And any car company dumb enough to follow suit.

Fri, 01/02/2015 - 09:25 | 5614311 MalteseFalcon
MalteseFalcon's picture

The energy cost of an electric car @ 100 barrel was 1/3 of a gasoline powered car.

Now oil is $50 barrel.  Not low enough.  Keep cutting to $33 and then leave it there.

LOL.

Fri, 01/02/2015 - 08:56 | 5614272 anomalous
anomalous's picture

"Using oil for transportation is a mistake that is now going to be corrected with electric vehicles".
That is a doozy!
Liquid fuels are very hard to beat.

Fri, 01/02/2015 - 09:20 | 5614303 MalteseFalcon
MalteseFalcon's picture

You don't know much about the economics of electric cars.

Thu, 01/01/2015 - 17:09 | 5612991 Sudden Debt
Sudden Debt's picture

Cold fusion... the french are leading that team he? 

Yeah....

anyday now...

Thu, 01/01/2015 - 18:10 | 5613156 sun tzu
sun tzu's picture

Oil is used for combustible engines and industrial uses. Fusion reactors are for generating electricity for homes and buildings. Until a much greater percentage of vehicles are powered by batteries instead of gasoline, those two have nothing to do with each other. The thing holding back electric vehicles are the cost and efficiency of batteries, not the cost or availability of electricity.

Thu, 01/01/2015 - 23:49 | 5613864 MalteseFalcon
MalteseFalcon's picture

Check out the vehicle offerings from major car makers.  Most of them are including electric cars for 2015.

Not 2055, 2015.

They are here.

Thu, 01/01/2015 - 14:49 | 5612594 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Trying to explain the price of *anything* without reference to the denoiminator in the trade (the money itself) is foolish. "The money" in this case is the paper oil they can manufacture at will. Reminds me of a letter to the editor of the FT recently: "Dear Sirs, thank you for your lengthy article of December 10. I now understand what QE is. My problem is that I no longer understand what money is".

Thu, 01/01/2015 - 15:02 | 5612628 maskone909
maskone909's picture

Step one: rig the system

Step two: find paul krugman and award him nobel prize for validating rigged system

Step three: crash system and make joe six pack pay for it- but make sure he understands that its his fault and his patriotic duty.

Rinse repeat

Thu, 01/01/2015 - 15:27 | 5612618 bitterwolf
bitterwolf's picture

nothing goes up continuously....i.e.......while global GDP doubled in 10 years...there were also massive gains in efficiency that most folk are loath to talk about.....telecommunications advances....ubiquitous high speed internet.....the explosion in mobile communications...the advances in smarter software replacing humans and other machines...the doubling of fuel efficiencies in ICE engines and the introduction and ramping use of alternative energy sources.....cloud based marketplaces with near same day delivery of almost anything produced by Man.....this has DESTROYED whole industries and THOSE jobs are never coming back..... we have exponential gains in productivity without the past labor qoutient needed=LESS DEMAND FOR OIL

Thu, 01/01/2015 - 16:46 | 5612931 LawsofPhysics
LawsofPhysics's picture

"nothing goes up continuously" - correct, including the numbers of any one species.

While we have had gains in productivity, they were not exponential and they required a tremendous input of capital and resources.

By the way, the "labor" you are so quick disregard is still alive and building guillotines.  They keep mumbling something about "shared sacifice."

 

Thu, 01/01/2015 - 17:27 | 5613037 bitterwolf
bitterwolf's picture

what...............................................................................................................................................

Thu, 01/01/2015 - 15:08 | 5612639 SAT 800
SAT 800's picture

Much too logical; reccomending moar waffles. No, seriously; "everything is rigged"; I think you're on to something there.

Thu, 01/01/2015 - 15:22 | 5612662 piratepiet
piratepiet's picture

dt

Thu, 01/01/2015 - 15:44 | 5612706 DaveyJones
DaveyJones's picture

it's all tricks, all paper tricks. No cardboard changes the physical world and how a growing number of people use this stuff. Oil is not like any other "commodity." And the US is one of the few countries (and economies, thank you fiat, freaks and felonies) unfamilar and unable to handle the true cost of oil. Our "strength" is our ultimate weakness.

(to repost)

Anyone who has followed peak oil and world oil production plus consumption knows that WORLD consumption would rise while western consumption would fall. It also knows that the classic producing countries would need to keep (increasing) percentages of their production. While the (unavoidable) rising cost in energy (measured in energy not dollars) will definitely set back economies, nothing fully explains the Saudi moves without the criminal collusion with the US and the amazing coincidence with all the rhetoric flying between putin and the podium president.   

http://www.energytrendsinsider.com/2014/07/10/world-sets-new-oil-production-and-consumption-records/ 

 

Thu, 01/01/2015 - 16:02 | 5612788 Mike in GA
Mike in GA's picture

Are you saying then the demand numbers are rigged or that this is a paper price reshuffle by the banks?

It just doesn't make sense to me for banks (or "a" bank) to be able to pull off a 50% drop in the world's most widely traded commodity all to get a lower entry price, if that's what you're saying.  Did I miss something?

 

Thu, 01/01/2015 - 17:05 | 5612977 Sudden Debt
Sudden Debt's picture

Remember George Soros? 

He wasn’t a bank and he brought the English central bank to it’s knees back in the day!

Thu, 01/01/2015 - 16:38 | 5612901 jcaz
jcaz's picture

"Shorting" is the tail wagging the dog- it always comes down to supply and demand.  Too much shorting leads to squeezes in the price up,  not down.    Shorting isn't some dark evil science-  it's a short-term hedge that eventually goes bad.

One problem with your Chinese demand numbers-  it's predicated on fraud.  Commodity prices have dropped because demand isn't there-  China isn't stuffing the channel like they have been the past 10 years.  it's no coincidence that iron ore and copper are also puking-   less demand= lower prices.

China has run out of places and credit to park their phony GDP-  the rest of the world (who has bot into their bullshit because China appeared to be the only source of booming growth) slows down as a result-  simple.

Thu, 01/01/2015 - 17:01 | 5612968 Sudden Debt
Sudden Debt's picture

Iron and copper, a good one!

 

Okay, remember all those warehouses in china where all that stuff was stored?

And remember when they found out most of them where empty or sold 20 times over?

Hmmm... so supply dropped like a brick... and prices dropped... soundslike global warming to me...

Thu, 01/01/2015 - 13:32 | 5612391 techstrategy
techstrategy's picture

The energy infrastructure will be competely transformed over the coming 2-3 decades.   The simple reality is that easy to recover reserves are concentrated in foreign lands,  many with bad actors in control.   If we invested our time and energy into transforming our infrastructure and creating operational hedges,  we'd be vastly better off.   There's plenty of available energy,  just not where it is needed and not in the form needed...

Thu, 01/01/2015 - 13:42 | 5612425 KnuckleDragger-X
KnuckleDragger-X's picture

Sounds good but as long as the greedy are running the show I don't expect much useful action.

Thu, 01/01/2015 - 13:51 | 5612452 Oldwood
Oldwood's picture

The path to riches is by limiting supply while increasing demand. When players can own both sides of that trade, we are fucked.

Thu, 01/01/2015 - 17:59 | 5613111 Karlus
Karlus's picture

Why would you trade delicious oil for dollars....I thought the oil was the wealth...

Thu, 01/01/2015 - 13:51 | 5612455 techstrategy
techstrategy's picture

It will happen and cannot really be prevented.  Fundamental economics support the transition.   Island economies foreshadow the transition.   Solar is simply more cost effective than imported oil driven electricity production and even this drop in oil prices doesn't change that.   Over time,  the unit economics of renewable energy gets more attractive while depletion based energy gets worse.   Let the Saudi's produce all they can from Ghawar while we invest that energy surplus into transforming our use of energy... Operational hedges (natural gas cars,  electric,  flex fuel vehicle) that will enable consumption based in lowest delivered cost.  That is the right way to win.   Invest in ourselves.   Invest in our domestic self sufficiency and resiliency. 

Thu, 01/01/2015 - 14:55 | 5612611 Oldwood
Oldwood's picture

And where will this investment capital come from to further our energy independence in a downward economic spiral? The Ponzi?

Thu, 01/01/2015 - 18:37 | 5613242 TheRedScourge
TheRedScourge's picture

Without three orders of magnitude worth of improvement in energy storage tech, renewable energy will never be able to supplant non-renewables as a source of base-load power. What do you do when the wind stops and it's cloudy and cold out, or in other words, winter in most non-equatorial countries? You fire up the natgas plants, that's what.

Thu, 01/01/2015 - 13:56 | 5612464 One And Only
One And Only's picture

I love this "we" thing you're on..."if we invested our time and energy...." 

No one is stopping you sport. Go out and transform our infrastructure, you seem so full of great ideas. 

I'm fine with shit how it is so don't go volunteering me, my time, or my money with your "we" rhetoric.

Thu, 01/01/2015 - 14:14 | 5612521 techstrategy
techstrategy's picture

I am.   I have a couple of energy related startups basing our business models of fundamental economics,  not subsidy dependent opportunities.   But, before you get all high and mighty on what it will cost you,  you should actually try understanding the facts of how you are already subsidizing the traditional, centralized energy producers.   Global subsidies to traditional production dwarfs (were talking order of magnitude) that to new energy systems.   Cato estimates we have been spending on  the order of $100B a year maintaining oil security for decades.   You pay that.   It's called taxes.   And then there are all the production incentives...  So,  try being just a wee bit intellectually honest as you get on your soapbox...

Thu, 01/01/2015 - 14:23 | 5612545 One And Only
One And Only's picture

I know how much I pay. That's why I asked you to stop saying "we". I'm contributing enough as is. 

If you are doing things with your own money and willing investors more power to you. 

Thu, 01/01/2015 - 14:42 | 5612582 techstrategy
techstrategy's picture

I am.  And our success will save you money.   This,  you are indirectly freeloading off of me :-).  Just kidding.   But, try to think about total costs for an intellectually honest comparison.   The Status Quo sucks and is slowly killing all of us. 

Thu, 01/01/2015 - 16:17 | 5612820 LawsofPhysics
LawsofPhysics's picture

If anyone is paying you for your technology, they are not freeloading. By the way, technology/innovation never stops/sleeps.

Thu, 01/01/2015 - 16:31 | 5612883 MalteseFalcon
MalteseFalcon's picture

"By the way, technology/innovation never stops/sleeps."

Technology is supressed all the time.  It is, IMHO, the great unwritten story of the 20th century.

Thu, 01/01/2015 - 16:47 | 5612938 LawsofPhysics
LawsofPhysics's picture

Yes, technology is, populations are not.  Most don;t understand the amounts of capital and resources that are required to bring innovation to the market either.  Ask yourself, has America been investing it's capital (money is not capital) and resources wisely?  Might be a good time to move your company.

Thu, 01/01/2015 - 23:50 | 5613866 MalteseFalcon
MalteseFalcon's picture

For example, do you understand how the US patent system used used by the status quo to stifle innovation?

Thu, 01/01/2015 - 14:49 | 5612600 Omen IV
Omen IV's picture

"reserves are concentrated in foreign lands,  many with bad actors in control."..............100B a year maintaining oil security for decades

first the spending is more like $500 Billion / year - most of the spending is not about reserve location  - because the MIC would demand the money be spent anyway - the "bad actors" have to sell the oil to get liquidity to do what they want - so the oil will have to be sold on the open market

The idea the USA has a role to play is bogus - Saddam Hussein / Iran / Russia / SA all have to sell the oil  - absent USA  - Saddam Hussein would be selling oil today

if the USA got out of the economic mercenary business we would be all better off and the world safer

Thu, 01/01/2015 - 18:49 | 5613271 anomalous
anomalous's picture

Let's stop subsidizing ME oil exports! We can't afford it!

Thu, 01/01/2015 - 18:22 | 5613192 sun tzu
sun tzu's picture

The technology is not there yet for mass production of affordable and efficient electric cars. Even if we try to convert our 254 million vehicles to battery powered electric vehicles, where will we get the raw materials from to build all those batteries? The largest lithium reserves are in unstable countries like Afghanistan and Bolivia. Then we have to figure out how to deal with battery wastes from those 254 million huge batteries. Lithium is toxic and so are battery acids.

Thu, 01/01/2015 - 20:04 | 5613430 Elliott Eldrich
Elliott Eldrich's picture

It depends on which lithium battery chemistry you are talking about. For example, Lithium-Ferrous-Phosphate (LiFePO4) batteries are are so non-toxic that they are approved by the EPA for direct dumping into landfills upon EOL. There's a lot going on in this area, I suggest checking out Allcell tech and seeing what they're up to, they have some impressive batteries. I know because I have one in my custom home-built electric bicycle.

Fri, 01/02/2015 - 00:13 | 5613892 MalteseFalcon
MalteseFalcon's picture

"The technology is not there yet for mass production of affordable and efficient electric cars."

Let's see.  Who to believe?  sun tzu or Nissan, Toyota, Kia, Volkswagen and Mercedes?

Hmmmm.

Thu, 01/01/2015 - 13:33 | 5612395 pipes
pipes's picture

Look for the missing barrels in (under) Denver.

Thu, 01/01/2015 - 13:34 | 5612400 Oilcrashing
Oilcrashing's picture

Commodities are crashing because they have been previously inflated by the QEs. The world market has been flooded with expensive oil, expensive iron, expensive cooper and so on (because, you know, fundamentals dictate that we need a lot of raw materials to grow to the infinity and beyond) that will be sold at very low prices. These prices are well below the breakeven prices for these industries.

The result: Commodities' companies will default in the coming months as they won't see enough returns. In order to propel the supply again, these companies will have to be rescued by the taxpayer and consumer. But the latest will be so exhausted that the cycle will repeat again. Commodities and customers will default. We are witnessing the first stages of a deflationary collapse. If you do not own debts, you are in a good position. However, the social upheaval that will follow these crisis is going to affect you anyway.

 

Thu, 01/01/2015 - 13:43 | 5612428 Usurious
Usurious's picture

BINGO

 

''So the cliff-diving price action here is not just another commodity cycle, but instead is a proxy for the fracturing global credit bubble''

David Stockman

Thu, 01/01/2015 - 13:44 | 5612431 KnuckleDragger-X
KnuckleDragger-X's picture

Everything has been manipulated by people who think they can ride the tiger but the tiger is getting pissed and hungry.

Thu, 01/01/2015 - 13:47 | 5612438 jomama
jomama's picture

QE never ended, and the EU, the US, and Japan are still racing to debase their currencies at the same rate. That doesn't fit your formula.

That and this is no supply and demand model, especially when the world's annual production of Au trades in a single day on the global exchanges.

Thu, 01/01/2015 - 14:50 | 5612602 Professorlocknload
Professorlocknload's picture

True. Printing presses generally don't have a "Deflate" mode. At least until they blow a fuse.

Thu, 01/01/2015 - 14:54 | 5612607 Oilcrashing
Oilcrashing's picture

The shale bubble has been possible due to the several QE. QEs work diluting the purchasing power of customers.

The FED floods the market with money at ZIRP(at expense of the customers). This money is used to issue loans for the fracking companies(or any other good-looking investment, but I think everyone knows here that this policy creates bubbles and misplaces investment). As this oil is difficult to extract, its production cost is higher. As long as the customer is able to pay for it and demand is strong, the price is still high and companies are still profitable, as they are seeing returns. However, as time passes by, customers lose their purchasing power (I think you'll agree that paying for expensive oil during a considerable amount of period isn't good for the economy). Something has to give up in the end, and in this case, it is the price of the commodity.

They did the same in Detroit. They financed and rescued a bankrupted industry, so it could continue to manufacture cars that were not sold in the market. 

Reality is that we couldn't afford to purchase this oil in the first place. But the only sources of oil that were (and are) available at that moment are expensive to produce, so this detracts a lot of resources from the non-energetic part of the economy, which as result has to cut more spending and is less able to maintain the consumption rate of these resources(including the same expensive oil) . Without them, the economic growth will have come to an abrupt end. But everyone decided to kick the can down the road hoping for something (maybe a technological miracle?) that will solve our problems and make our economies to grow again so we could be able to pay the debt off. Now this is coming to an end. I don't think the can could be kicked too far from here, though there is still a small room to delay the inevitable outcome.

Thu, 01/01/2015 - 15:55 | 5612768 Harry Balzak
Harry Balzak's picture

Could Govt demand for currency be contributing to deflation [in spite of all the QE and ZIRP]?  Even with all the currency production around the world, govt obligations are larger than they've ever been and growing faster than money production.  

The US govt has perhaps 150 to 250 trillion in unfunded liabilities and needs an economy of perhaps 500 trillion from which to extract it's resources.  It doesn't have institutionalized methods of extracting currency at it's rate of consumption and lacks the political capital necessary to impose it.  So instead it is reverting to fines for 'violations' which never criminally affect anyone (well, maybe some low-level suckers that never make the news).  

I suspect TPTB attempt to calculate the maximum rate of currency growth relative to buying power.  With the commitments govts have made, they need purchasing power, too.  

I wonder if govts around the world suddenly reduced spending if an inflationary spike would occur?  

Thu, 01/01/2015 - 18:35 | 5613233 sun tzu
sun tzu's picture

QE hasn't ended, but it has slowed down. Now there is less toilet paper flooding the markets to chase commodities. 

Thu, 01/01/2015 - 14:50 | 5612598 LawsofPhysics
LawsofPhysics's picture

The bottom line is this, there are still 7+ billion people (and growing) on this rock competing for a better quality of life and all the calories and commodity chemicals that make that possible.

Guess where those calories and commodity chemicals come from?  There is still plenty of demand for oil and physical assets of real value.   As for bullshit paper claims/promises or financial "products" of mass destruction, no so much.

Thu, 01/01/2015 - 21:28 | 5613610 wrs1
wrs1's picture

based on this notion, gold should be $500.

Thu, 01/01/2015 - 13:37 | 5612413 McCormick No. 9
McCormick No. 9's picture

Lower oil prices will, eventually, lead to higher demand, as everyone ditches their underpowerd Prius for a gas guzzling monster truck.

Or maybe not. The toss-up is this: Will the demand plunge become self-sustaining as lower oil prices impact bond yields (up), and this drive credit-crunches that suppress demand in critical areas, this keeping demand down, driving debt-carry costs up, and this further impacting oil prices lower, (and repeat)?

Or, will lower oil prices allow global debt to be paid down, thus allowing for more growth, thus increasing demand, and eventually, a resurgence in oil prices?

I'm betting on the first case.

Thu, 01/01/2015 - 13:55 | 5612468 Oldwood
Oldwood's picture

Who, in their right mind (besides we deluded ones) wants to pay off debt? It is apparent to me the goal is to ramp debt as much as possible before it crashes, and once crashing, rely on the government to backstop or reset or otherwise negate these debts, to "save the system" by systematically destroying it.

Thu, 01/01/2015 - 18:37 | 5613239 sun tzu
sun tzu's picture

When the system crashes from the weight of the debt, it will be the elites who will be bailed out. You can rest assured that your debt won't be forgiven. 

Thu, 01/01/2015 - 13:57 | 5612471 TBT or not TBT
TBT or not TBT's picture

In such cases, the demand curve doesn't shift so much as sort of fade.  

Thu, 01/01/2015 - 14:53 | 5612606 garypaul
garypaul's picture

Your second case reminds me of one of those "perpetual motion machine" paintings (looks good only on paper).

Thu, 01/01/2015 - 13:38 | 5612418 techstrategy
techstrategy's picture

It is all about distributionally driven demand destruction from decades of ponzi fractional reserve banking having created phantom financial claims on real flows of value produced by labor and actual savings/productive investment.   The Federal Reserve and G3 Central Banks are doing their best to cover for the original sin of the FRB ponzi,  but the natural tendency of the system is to concentrate wealth and income in the financial sector.   It is now up against very fundamental demographic and system level (energy) constraints.   There is 1 and only 1 semi stable path to transition from the financial asset ponzi and that is for real assets to go parabolic.   Only gold can reliquify the system sufficiently rapidly (other real assets require cash flows to support valuations).

Thu, 01/01/2015 - 14:02 | 5612489 MrPalladium
MrPalladium's picture

"Only gold can reliquify the system sufficiently rapidly (other real assets require cash flows to support valuations)."

The most important idea to be posted on Zerohedge in years!!!

Thu, 01/01/2015 - 15:20 | 5612669 SAT 800
SAT 800's picture

You, me, and Professor Fekete agree; and the three of us and God make a majority. And fuck all the Phd. Economists of the "world of mists"; I like that, I just made it up. Fortunately, there's a lot more of us than 3; I was fascinated to see that "human beings"; to quote the original source, own 160,000 Tonnes of Gold; Central Banks, 33,000 Tonnes. Talk about power to the people ! Just make sure you get your share; while it's still available.

Thu, 01/01/2015 - 14:15 | 5612525 Oldwood
Oldwood's picture

Are we talking hyperinflation?

"There is 1 and only 1 semi stable path to transition from the financial asset ponzi and that is for real assets to go parabolic."

Does this mean that all of this debt will be made good as the assets from which they are levered are grossly inflated in value? Is this not their plan all along, except that their plan is for the elite to ultimately hold the debt AND the asset?

 

Thu, 01/01/2015 - 14:30 | 5612561 techstrategy
techstrategy's picture

Most financial "assets" are inherently fraudulent.   TBTJ knows this.   The Fed knows this.   All those holding physical gold as well as those developing domestic productive assets will do well in nominal terms.   Else,  we end up in cascading deflationary default of financial assets which exposes the ponzi and creates massive societal instability (and based upon done if the anger I've read on these boards,  wealth might get redistributed via the inheritance tax paid by those that led or participated in the financial asset ponzi).  I'm simply trying to help people see the constructive and stable path to transition to capitalism again. 

Thu, 01/01/2015 - 14:51 | 5612605 LawsofPhysics
LawsofPhysics's picture

Unfortunately, in the absence of real retribution there is no "stable transition" motherfucker.  What has been stolen must be returned and those responsible must suffer real consequences.

Thu, 01/01/2015 - 15:27 | 5612678 techstrategy
techstrategy's picture

I understand how you and millions of others feel.  I want justice as well (would like to disgorge their ill gotten gains) and I believe there is a special place in hell for all those behind the greatest confidence game in history.   But, my first goal is to help restore the connection between value creation and value capture.   We can affect that outcome.  The FRB ponzi depends upon our participation...  Once brought back into balance with honest money, we will again tend toward stability and prosperity through Capitalism and market forces. 

Thu, 01/01/2015 - 16:09 | 5612797 LawsofPhysics
LawsofPhysics's picture

How you or I "feel" is fucking irrelevant.

Do you or do you not really want to see humanity advance for the better?  If your answer is "yes" then you must remove all the bad actors from the system and especially from positions of power.

Unfortunately because of how far things have progress (i.e. regulatory and judicial capture), what you are asking for is for these same criminals to essentially indict, convict, and jail themselves. To deny that there must be real consequences for bad decisions and poor management is to deny capitalism itself.  Good luck with your cognitive dissonance.

Any serious student of history can see that the event horizan was crossed some time ago.  Balance will come, but it won't be through clever political speechs or new monetary experiments, it will be by iron and blood.

Thu, 01/01/2015 - 16:39 | 5612912 MalteseFalcon
MalteseFalcon's picture

I don't agree with retribution, however the miscreants must be removed somehow.

I suspect that they will be removed from the "world stage", but we'll still be stuck with them here.

No glasnost or perestroika for us apparently.

Thu, 01/01/2015 - 21:32 | 5613618 wrs1
wrs1's picture

Once brought back into balance with honest money, we will again tend toward stability and prosperity through Capitalism and market forces. 

 

This is a belief based statement similar to Jesus will forgive you of your sins.  Whatever sins might be or whoever jesus might be, capitalism and market forces are as real as jesus and sin.

Thu, 01/01/2015 - 13:42 | 5612419 One And Only
One And Only's picture

The price of oil is dropping because the FED created cheap credit that ended up in shale fracking. It's also falling because the FED stopped QE which is the catalyst for the dollar rising (as well as a world that thinks the FED will probably raise rates in the next year or two. So, strong dollar and misallocated resources due to easy credit. That's it, it's not calculus. What happened when the FED did this last time? Expensive homes got cheaper, just like oil today.

In her last press conference of the year Yellen said "the price drop in oil is transitory". That eerily echoes Bernanke's "sub-prime is contained" comment.

Thu, 01/01/2015 - 14:02 | 5612482 disabledvet
disabledvet's picture

My view too.  More importantly credit will continue to be extended into this space thus driving output higher.  After that "pricing will be determined"...something I've never understood why the Fed comments on. 

 

Never understood why the Fed comments on anything actually.

Thu, 01/01/2015 - 15:09 | 5612646 LawsofPhysics
LawsofPhysics's picture

"the FED stopped QE" --  bullshit.  The primary dealers can still access hundreds of billions of dollars at 0.25% motherfucker.

For them, QE has NOT ended.

Thu, 01/01/2015 - 16:10 | 5612803 HardlyZero
HardlyZero's picture

last QE ended in October 2014.  The longer there is no more QE (now a few months), the more the markets are adjusting their physical reality.  Now the collapse occurs (was suspended for 6 years).   The return to normality without so much CB printing will eventually occur, and interest rates will again reflect actual risk.  Many will bankrupt and risk will become apparent.  Reality will reveal basic truths that were obscured.

Thu, 01/01/2015 - 16:18 | 5612829 LawsofPhysics
LawsofPhysics's picture

Nice avoidance there.

 

Let me be clear motherfucker.

1)  ZIRP is QE!!!

Are you really suggesting that interest rates will rise?  LMFAO!!!!

Thu, 01/01/2015 - 16:32 | 5612876 HardlyZero
HardlyZero's picture

When not if.

Amusing.

ZIRP and NIRP will end at some point as banruptcies begin to mount.

Thu, 01/01/2015 - 16:34 | 5612888 LawsofPhysics
LawsofPhysics's picture

Okay, when will interest rates rise then?  Do tell, or STFU.

Here I'll go first, they won't, the talking heads at the Fed will keep jawboning but one excuse or another will be given for not raising rates at least through 2020.  Some bankrupcies may come, but the owners and management will be left unharmed with their wealth intact.  401k sheep and retail, not so much.

Thu, 01/01/2015 - 18:44 | 5613253 sun tzu
sun tzu's picture

ZIRP was only one of the components of QE. The other component was the Fed directly pushing $85 billion into the markets each month. That has slowed for now. Oil was $35 in 2009 before QE1. Oil hit $110 during QE3. Oil is now $53 after QE3. The same happened to all other commodities prices, such as NG, crops, industrial metals etc. 

It's obviously what happened. The banks can still borrow at the Fed window, but that doesn't mean they are currently borrowing. 

Thu, 01/01/2015 - 13:38 | 5612420 Winston Churchill
Winston Churchill's picture

The only question is when do the credit markets really crap the bed ?

Six month lead time before the crash in 2008, and we are already a couple in now.

$12 tn in QE around the world, and all we will got for it  is a liquidity crunch on a

global scale.

It would be ironic if it wasn't going to be so painful.

Thu, 01/01/2015 - 14:00 | 5612481 NihilistZero
NihilistZero's picture

We're in a liquidity trap, not a liquidity crunch.  Everyone saying the FED won't tighten because it would tank the stock market is missing the bigger picture IMHO.  The only way to save the market is to tank housing and energy by removing stimulus.  The proles have shown time and again that consumerist programming works.  They will spend disposable income if available because saving if for the 1%.  Deflation in housing and energy costs to save the stock market through increased consumption.  It's the only play the FED has left and All indicators are they are full steam ahead with rate increases just as Housing Bubble 2.0 is popping.  The resulting crunch in rents and mortgages should put hundreds of dollars in many families hands each month...  and 'Muricans go shopping when they get $$$ :-)

Thu, 01/01/2015 - 14:20 | 5612534 Escrava Isaura
Escrava Isaura's picture

 

 

NihilistZero

Interesting post!

 

Fed giving up on 'Bubble' housing, and along with Saudi Arabia in dropping oil prices.

 

I am saving this post by you..... I might have to add this to Zero Hedge favorite post....., in 2016.

 

Thu, 01/01/2015 - 14:45 | 5612584 maskone909
maskone909's picture

Indeed. We all knew that the effects of QE would rear its ugly head one day. Its just a question of when and how. Energy AND money has its own will.

Thu, 01/01/2015 - 14:22 | 5612544 Fed-up with bei...
Fed-up with being Sick and Tired's picture

The movement of money through the system is slowing, demand drops.   We have a terrible situation where we have MORE oil than is needed, with many teetering economies, and there is nothing we can do.   Job losses, in the end, shrinks demand.  We cannot depend on the top 30% to produce enough demand, and everyone is drowning in debt.

Thu, 01/01/2015 - 14:30 | 5612563 disabledvet
disabledvet's picture

Europe sure is...although they're nuking the euro to "compensate.". Japan looks like a carry trade.  Russia has massively inverted the yield curve so that's contractionary.  China looks like a bubble bursting.  

My personal view on the USA is we're clinically insane. We're not standing for our values and we're not even explaining that we have beliefs let alone morals.

Doing a great job leading by example with all the torture stuff and "agonizing choices" right?  Entire human race about to be wiped out here?

Not before we provoke Russia and then stand by and see what happens?

 

Oh, yeah.  "Winning."

Thu, 01/01/2015 - 14:33 | 5612568 Oldwood
Oldwood's picture

As to if the stock market tanks, I believe its timing is determined by WHO actually owns the stocks. Once the elite have rotated from stocks, selling them at grossly inflated prices to the "money on the sidelines" and the retirement funds and other slush "mutual" type funds that ultimately are owned by the general population, then the government can raise interest that will benefit those holding real assets as well as cash, while crashing the ponzi markets. The monied elite can come in and buy up real assets with their cash, foreclose on the debt they are holding, and clean house. AS long as the government remains in force, gold will never be allowed to compete with ANY currency, especially the dollar or whatever they claim as their own.

No one who ever starts a Ponzi believes it will last for ever. It is designed to follow a path, one that ideally profits its creators through timing. Its always about knowing when to get in and when to get out. All of the players who think they know something, only know what they have been lead to believe. They are an essential component of the ponzi, for it is those who know that it is a rigged game (but do not control the rules) that make the game. All of these people who have been making money from this game, believe they are smart, that they have the inside track. They are simply the booster club for the owners of this game. They are the metal trays that receive the coins paid out on the slots, making immense noise with each winning pull. They are the draw, the bait to the game.

If we are to have a clue as to the timing of this game we must watch who is selling, and how much, and to whom. Follow the money. When Goldman and JPM are substantially out....it will be too late to run.

Thu, 01/01/2015 - 18:31 | 5613196 NihilistZero
NihilistZero's picture

Agreed. However I don't see how you get the proles to rotate into stocks until you destroy residential RE, both as a competing investment option as well as competing for Joe6PAC's $$$. The FED needs a consumer boom that is not based completely off insane debt. If they can engineer something like the mid 90s where housing and energy are a reasonable percentage of household spending, consumption will rise. Then stock PEs look tamer and you can get the lemmings On the coaster. Given that, TPTB can then front run the rotation back into hard assets and energy.

Thu, 01/01/2015 - 16:11 | 5612806 LawsofPhysics
LawsofPhysics's picture

Remind, how many "proles" are actually gainfully employted again?  The real numbers, not the fake ones.  If a proles is "spending" a government handout, you haven't accomplished jack shit.

Thu, 01/01/2015 - 18:17 | 5613171 NihilistZero
NihilistZero's picture

If 20% are unemployed, 80% are employed. All that matters is capacity utilization. Even if much of the 80% are below middle class the can still move the needle if their discretionary income increases as the result of a drop in their fixed costs. Lower gas prices are helping local businesses RIGHT NOW. i could give a shit if their hurting some Shale/Fracking speculators. Much as lower rental mortgages outweigh some Boomer's hope of financing his retirement with a housing windfall.

Thu, 01/01/2015 - 16:35 | 5612895 Mike in GA
Mike in GA's picture

The Fed's in a liquidity trap, the rest of America is in a liquidity crunch.  The Fed's infinite printing has led to the "pushing on a string" phenomenon.  Demand destruction is reality.

If the final fed move is to "tank housing and energy", they would surely be killing the golden goose. How much more will the middle class take?  The only people in favor of declining house prices - potential buyers - are vastly outnumbered by the rest of us who would lose tremendous amounts of equity.  Raising rates now would also set off a bond market rout wouldn't it?  And with 18 trillion in debt, low rates are the only thing keeping us"solvent".

If what you contend is actual Fed policy, we are most definitely in the last inning.

Thu, 01/01/2015 - 18:10 | 5613127 NihilistZero
NihilistZero's picture

"The only people in favor of declining house prices - potential buyers - are vastly outnumbered by the rest of us who would lose tremendous amounts of equity." You are COMPLETELY off base. Renters and potential buyers as well as every industry that relies On consumer spending benefits from lower RE prices. One need only look to the mid 90s when purchasing power was high and debt as a percentage of consumption was MUCH lower than now. Both energy and RE natural price discovery still existed then. Their return may not benefit you and your phantom equity, but it would bolster the overall economy and increase demand.

"Raising rates now would also set off a bond market rout wouldn't it? And with 18 trillion in debt, low rates are the only thing keeping us"solvent"

A modest rate rise is not going to make us insolvent, hell we're already insolvent! It's All a shell game anyway. Higher interest payments by.gov could be monetized by the FED through 3rd parties anyway (hello Belgium) we already owe 1/3rd of the debt to ourselves. It's All accounting bulls hit. The fact is the ONLY way out of this malaise is to get consumer spending up. This also takes stock valuations out of full retard mode. Inflation hasn't worked so the FED has no choice but to try and pick and choose some "good" deflation that will give consumers the spending power to prevent the "bad" deflation in commercial paper and RE.

Thu, 01/01/2015 - 13:42 | 5612426 q99x2
q99x2's picture

This is the best article of 2015

Thu, 01/01/2015 - 14:06 | 5612496 Midas
Midas's picture

Didn't you make a new years resolution to cut back on smart-ass comments?

Thu, 01/01/2015 - 13:45 | 5612432 yogibear
yogibear's picture

Eventually some people drown in a sea of trillions in liquidity.

Debt in every crevice.

Thu, 01/01/2015 - 13:49 | 5612444 Loophole
Loophole's picture

What have govts done besides redistribute wealth since the 2008 economic collapse to "stimulate" economies? Much of such redistribution having been done by money printing.

And why should stealing be good for an economy?

What's going to happen when they run out of victims to rob in order to artificially prop up economies?

Thu, 01/01/2015 - 14:39 | 5612576 daveO
daveO's picture

Banks will be forced into accepting gold deposits again.

Thu, 01/01/2015 - 16:28 | 5612873 Harry Balzak
Harry Balzak's picture

Could it be that govts will simply take over the economy?  

Isn't that essentially what the US is doing by creating currency from nothing and eventually buying securities with it?  

The govt is by far the single largest consumer of everything, currency included.  They've got huge unfunded liabilities so they need to expand the currency supply.  These liabilities will only grow as funding mechanisms for various services fail (property taxes contributing to pension funds, for example).  The USG insures these funds, so they'll need to increase the money supply even more to service the benefits.  

How will they do it?  I suppose they could nationalize the pension obligations and dump them on the taxpayer.  Or, they could buy up all the paper contained by the pension funds and take over the entities that the paper represents.  

The USG could then corrupt the accounting and reporting for these entities and make the picture look rosy again.  The USG will become the biggest owner of said entities, and probably the biggest customer, too.  They'll essentially nationalize entire industries.  They're going to do it with health care, that's for sure--they are providing the resources to pay for services they will eventually deliver.  I bet they'll be doing it with real estate, too, in order to clear the market from all the overpriced crap that's out there now. Instead of selling the oversupply of houses, perhaps they'll set up a govt program to give them away based on 'need', which will devolve into a real estate management company as those recieving cheap housing want govt to service the properties.  

But this is what the USG believes it needs--more 'sinks' to absorb currency to prevent devaluation.  They will attempt to control inflation and deflation by managing both supply and demand for huge swaths of the economy.  

Isn't this what the USG did with GM?  They broke contracts and confiscated bondholder paper to settle GM's affairs as they saw fit.  I don't have data, but I wouldn't be surprised in the govt is the largest single consumer of GM products.  

Could this not serve as the precendent for economy-wide takeovers?

 

Thu, 01/01/2015 - 16:37 | 5612897 LawsofPhysics
LawsofPhysics's picture

Nationalization has already happened throughout Central and South America, how's that working out for them?

Thu, 01/01/2015 - 16:43 | 5612922 Harry Balzak
Harry Balzak's picture

Horribly, and it hasn't worked well here either.  But why would you think that will stop them?  They won't stop, but try instead to manage how people perceive the failure.

I've already noticed a considerable uptick in news stories in the MSM that are laying the groundwork for reduced availabilty of health care and it's all being framed as a 'positive'.  Why?  To get the proles accustomed to reduced availablity/quality.  

It's propaganda the govt desparately needs to minimize political fallout when their management failures become prevalent.  

 

Thu, 01/01/2015 - 16:59 | 5612962 LawsofPhysics
LawsofPhysics's picture

That which cannot be sustained, won't be.

Some things can be avoided, some cannot, just ask T. rex about the latter.

 

The sad thing being, in this case, humanity did it to itself.

Thu, 01/01/2015 - 17:12 | 5613000 Harry Balzak
Harry Balzak's picture

I couldn't agree more.  For the past number of years I've been anticipating a catastrophic collapse of something.  The anticipated collapse would come with visable adverse impacts.  So far, it hasn't materialized.  

Maybe this isn't how it will go.  Maybe instead it'll be a gradual petering-out right under our noses, failing here-and-there over 100 years (which it has been doing, in spite of technology masking the effects).  

 

Thu, 01/01/2015 - 16:46 | 5612935 MalteseFalcon
MalteseFalcon's picture

It is working out fine for those in control.

Thu, 01/01/2015 - 17:05 | 5612983 Harry Balzak
Harry Balzak's picture

Exactly; and I guess that's my point.  

One could even argue that it's not working out that well for them, but better than it would should govt intervention stop.

So long as that's the incentive--to keep things from being as bad as they otherwise would--I see no reason for govt intervention to recede.  

Following this model, collapse of the system (or even a just a portion of it) will only trigger more intervention until it appears fixed.  Keep re-inflating bubbles by bailouts and govt-created demand for goods from inefficient, govt-owned providers.  

Meanwhile, the economy on which all us proles depends continues to degrade.  So long as the govt can keep everyone distracted with a fear-of-everything-but-them strategy, lots of people won't realize it or won't care enough to risk their lives (which is what it may take to reverse the trend).  

Thu, 01/01/2015 - 17:15 | 5612900 Harry Balzak
Harry Balzak's picture

One more point--I don't agree with this model one single bit.  I just don't see any other way it can go.  

The govt percieves itself as sovereign.  It's integrity is what defines the existence of the nation.  None of the sociopaths in charge want to be saddled with national or global economic/currency failure, and from their perspective it's the integrity of the nation at stake.  

I believe they are fully aware of the degree to which they have inflated the current economic bubble.  In fact, I wouldn't be surprised if they believe it's even worse than it actually is.  The mechanisms are in place to keep pumping and pumping without public embarassment of political retribution.  Why not continue pumping, printing, and purchasing of everything under the sun?  

If they are socializing goods and services that a majority of the population will never obtain anyway (like housing--many 90%ers may never consider buying a house), or aren't likely to use in the near future (like health care--50% won't be needing it anytime soon), the USG has adequate time to manage perceptions regarding the degration in quality of these goods as govt mismanages them into oblivion.  

 

Thu, 01/01/2015 - 18:26 | 5613201 Harry Balzak
Harry Balzak's picture

The collapse is actually occurring right now.  Look at the inventory of average homes.  In my region (the south) there are huge numbers of vacant existing homes on the market, perhaps as much as 90% of properties listed.  30%+ are 'foreclosures'.  Condition of these properties is declining as they sit, yet asking prices are higher than 2006.  Even with all the financial incentives, few buyers are jumping in.  This market has failed.

Healthcare, as another example, is inefficiently price-fixed.  The USG is using Obamacare to force market participation, yet subsidizing 87% of enrollees.  It's also dictating coverage levels and price thresholds, so it's paying with one hand and collecting with the other.  

To what extent is govt affecting other sectors, like energy, agriculture, and transportation?  

I can see govt buying up securities in these other sectors until it becomes majority owner.  It will then take over certain capacity which it will run into the ground to cover it's obligations--all in the name of 'efficiency'.  It will contain runaway EBT costs by taking control of the entire EBT food production/distribution supply chain.  Same with health care, pensions, and energy.  It may not take over all of a given sector, but enough to meet it's obligations.  

The sad fact is the govt will do a horrible job running these entities.  As they lose ability to hide their failures, they'll increase involvement/confiscation/propaganda to mask the pain.  

Fed/State/Local govts in the US have spent 110 trillion since 1983 building systems to manage everything (very poorly, I might add).  These entities aren't going away, even though they've racked up 20 trillion in debt failing to achieve their goals.  

Govts will do what they've always done--take more control and resources to keep the ponzi afloat.  

Thu, 01/01/2015 - 14:05 | 5612445 Cycle
Cycle's picture

The debacle in the energy sector is due to classic central bank printing associated distortion of the time value of money resulting in a massive malinvestement in energy based on false projections of future economic activity. This would have never happened if interest rates had not been pinned to the floor by the Fed.

Thu, 01/01/2015 - 15:01 | 5612625 Pareto
Pareto's picture

+1000 Best response on this yet Cycle.  The time value of money has been eviscerated, so there is no longer any price mechanism available to price the true cost of capital because essentially, money is free and its not worth anything in its original form.

Thu, 01/01/2015 - 14:02 | 5612487 Oldwood
Oldwood's picture

The complete interconnected world we live in creates far too many opportunities for theft on a massive scale. What we are witnessing is only the perceived beginning of a morality play that results in societal collapse. Like it or not, the only sustainable society is based on honor and consequence, the two things that are dying before our eyes. Trust is the only real currency, and when it is destroyed it is not easily or quickly replaced. Anyone who has ever tried to run a business based on referral and reputation knows how long it takes to build it, and how quickly it can be destroyed. This is no different other than on a much, much grander scale.

The consequences will be dire...

Thu, 01/01/2015 - 14:25 | 5612553 Fed-up with bei...
Fed-up with being Sick and Tired's picture

I totally agree with this post!   Moral decay, lack of ethics, down-right continuous propaganda to "service" ill-conceived Oligarchic shenanigans...we are in a mess.  There is no way out.  I have never been as terrified of a collapse in my entire 61 years.

Thu, 01/01/2015 - 14:25 | 5612554 Fed-up with bei...
Fed-up with being Sick and Tired's picture

I totally agree with this post!   Moral decay, lack of ethics, down-right continuous propaganda to "service" ill-conceived Oligarchic shenanigans...we are in a mess.  There is no way out.  I have never been as terrified of a collapse in my entire 61 years.

Thu, 01/01/2015 - 15:04 | 5612631 LawsofPhysics
LawsofPhysics's picture

Many of us have been saying this for years.  Nature works because there are always real consequences for bad behavior/choices.

Thu, 01/01/2015 - 16:51 | 5612946 MalteseFalcon
MalteseFalcon's picture

True, but as one very proflagate French king once said:

"Apres moi le deluge."

Thu, 01/01/2015 - 14:04 | 5612493 alexmark2013
alexmark2013's picture
Like today, lower oil prices and bruised shareholders resulted from the oil glut seen during the Great Depression http://investmentwatchblog.com/like-today-lower-oil-prices-and-bruised-shareholders-resulted-from-the-oil-glut-seen-during-the-great-depression/
Thu, 01/01/2015 - 14:12 | 5612514 ajkreider
ajkreider's picture

Perhaps the reluctance at issue comes from the fact that no rational person could think that world oil demand fell by 50% in 6 months.

Rather,we should believed that $100 oil was speculatively high, and $50 speculatively low. Which is not to deny that some price softness is demand related.

Thu, 01/01/2015 - 14:19 | 5612535 yrbmegr
yrbmegr's picture

We see the claims, but there is never any data to support them.  This post is no exception.  The hard data that is available shows increased supply, particularly in the U.S.  I think most still believe that increased supply can also drive prices lower.  But, it's sexier to claim that the sky is falling.

Thu, 01/01/2015 - 15:20 | 5612597 socalbeach
socalbeach's picture

You guys need to review the basics of supply and demand curves.  Oil prices are inelastic on the demand side, so increases in price have relatively little effect on demand.  Equivalently, small decreases in demand have a large influence on price.  So in the following link, the red lines in the graph on the right would have a steep slope, and you wouldn't need a 50% decrease in demand to cause a 50% decrease in price:

https://en.wikipedia.org/wiki/Supply_and_demand

edit: or try this link, look at last graph in the main article, and notice how small changes in demand cause a large change in price (over the short term): http://www.theoildrum.com/node/2899

Thu, 01/01/2015 - 19:18 | 5613310 yrbmegr
yrbmegr's picture

Thank you for your advice.  I have reviewed the basics of supply and demand.  From your link:"

  1. If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price."  

 

That's what I thought.  Note, also, your second link teaches that small changes in demand...OR SUPPLY...cause large fluctuations in price.  Neither of your links support the claim that the price of oil is declining because demand is declining.  Nobody has produced any such data, to date.

Fri, 01/02/2015 - 05:40 | 5614158 Pareto
Pareto's picture

You keep saying there is no data to support it - no data to support it.  Well, try this,http://www.zerohedge.com/news/2013-04-06/these-charts-better-not-represe..., which incidentally, was about the time the oil and gas complex started to roll over as oil stocks have been getting crushed for months now - nothing new going on here.

I don't know what you want for "data", but, you have to admit that what I said earlier is relevant - rig counts and other exploration initiatives went exponential about 7 years ago, but, you cannot say that about demand!  And as far as "data" is concerned where your stubborness waxes you blind - every developed (industrialized) nation is hawking 2% GDP!!  If those numbers are even accurate!  Growth is tepid at best and likely overstated due to price inflation.

Besides, do you really think our benevolent government is going to provide you with the "data" you need to make some grand assertion (who the fuck are you?) or prohibit you from even considering the analytical arm of the discussion?  shit.

It amazes me that even here where the thousand or so articles that have pointed to the MASSIVE dislocation of capital as a result of ZIRP, the evisceration of the middle class and fixed income - the absolute batshit crazy expansion of oil and gas development RELATIVE TO DEMAND which would never occur EVER under monetary policy that wasn't so fixated on interest rate suppression- that you cross your arms in defiance and say "show me the data" to which I say, fuck you - show me otherwise!

Fri, 01/02/2015 - 11:54 | 5614720 socalbeach
socalbeach's picture

ybmegr - maybe it's a combination of both decreased demand and increased supply causing the price drop.  The oil drum link is  7 years old, so yes by itself it doesn't support the claim that falling demand is even partly responsible for falling prices. 

However, it looks to me like the worldwide economy is slowing down, so I think it's at least partly responsible.

Fri, 01/02/2015 - 19:14 | 5616673 Bemused Observer
Bemused Observer's picture

The statistic cannot be interpreted in a vacuum, yrbmegr. Oil is not an end-product in itself, it is an ingredient used in the making of other stuff. Oil is bought today to make the stuff of tomorrow. If folks anticipate making less stuff tomorrow, they will buy less oil today.
Now look at what is happening in the markets for that other stuff. Look at the Baltic Dry Index, see if the amount of 'stuff' being ordered is going up or down...
Is production being expanded, or is it contracting? This is not something you can do on a dime, no one is going to build or idle an entire production line of anything in response to a temporary mismatch of supply and demand. You'll have a couple of 'sales' to unload the over-capacity, and then things would go right back as before, with little loss of price overall. So whether it is growing or shrinking tells you what producers think of the market longer-term.

Are there any indications this will change in the immediate future? Well, look at wages, debt levels, etc...If you foresee a resumption of demand, you have to explain where you see the financing coming from...

Also, if it really WERE on the supply side, prices would not be driven down on future orders, as producers would know this was temporary. The fact that prices ARE being driven down, and hard, indicates that markets are showing something else at work over the longer term.

Thu, 01/01/2015 - 14:57 | 5612617 Pareto
Pareto's picture

Nu uh.  If it was strictly a supply issue - one of over production - prices would have, more or less, remained.  But, $100 oil isn't very useful if you are only moving 2 barrels of it, compared to $40, $30, or even $20 oil.  This is a demand problem, and demand is all about volume, not price.  Price is a monetary phenomenon.  To clear the relative imbalance in volume (between supply and demand), price has to fall to clear the physical markets.  There is nothing new here.  Certainly nothing that would point to the sky falling, in my opinion.  However, its happened before, its happening now, and it will happen again.

Another excellent example of this clearing mechanism is to simply take an historical look at other commodity prices, such as the cereal grains and feed stocks such as barley.  Want to see price moves....have a look at some of the price action in those spaces.  Shit.  The move in oil has nothing on some of these products over the years.

Fact is, ZIRP powered the most aggressive capital expansion initiative in oil and gas exploration EVER, with no change in demand.  Rig counts expanded exponentially - new technology made capped wells profitable again, and so on.  But demand was never commensurate with this expansion, and never would be - not even China was growing exponentially even if its growth measures were real.

Right now you can swing a baseball bat and hit oil and gas particles.  Don't expect this to change any time soon.  Moreover, as assets exchange hands between the levered and the prudent, such that the marginal cost of operations reduces even further - input costs will necessarily fall, suggesting the output price for oil to remain heavy at best.  This decline, I expect will plumb deeper and prevail a lot longer than most care to admit.

Thu, 01/01/2015 - 15:13 | 5612653 LawsofPhysics
LawsofPhysics's picture

Demand is declining?!?  There are 7+ billion people on this rock competing for a better standard of living and all the consumable calories and all the commodity chemicals that make the possible.  Guess where those calories and chemicals come from asshat?

Thu, 01/01/2015 - 15:34 | 5612701 socalbeach
socalbeach's picture

If we're entering or are in a world-wide recession, demand will drop over the short term.  Over the long term demand will increase due to the reasons you mentioned.

Thu, 01/01/2015 - 15:50 | 5612755 LawsofPhysics
LawsofPhysics's picture

In that case, do you have a short or long term survival plan?

Thu, 01/01/2015 - 16:55 | 5612959 socalbeach
socalbeach's picture

First step is to move out of S. CA, not a safe place to be obviously if things start deteriorating.

Thu, 01/01/2015 - 19:13 | 5613323 yrbmegr
yrbmegr's picture

Demand is certainly declining in the U.S., not due to economic contraction, but due to increasing energy efficiency and use of non-petroleum sources.  Demand worldwide is, I suspect, still rising.  I do not believe all the claims that demand is declining, chiefly because nobody points to any data that supports such claims.

Thu, 01/01/2015 - 19:11 | 5613317 yrbmegr
yrbmegr's picture

"This is a demand problem...."  This is the claim I keep seeing on this site, but no data to support it.

Fri, 01/02/2015 - 18:47 | 5616567 Bemused Observer
Bemused Observer's picture

Umm, wouldn't a decrease in demand lead to that oversupply?

If a market is suddenly 'oversupplied', doesn't that imply that sales are not keeping pace with production, for whatever reason?

You have to keep going back up the food chain to find out what is causing what.

Since wages have been stagnant and debt levels are at an all-time high, I find it a bit hard to swallow that business is doing so well they got a little ahead of themselves and over-supplied the market temporarily...
Seems more likely that the market was caught by the decline in spending, and are now 'selling down' the market in an attempt to find the proper levels. Spending can stop on a dime, but production can't be shut down overnight. So a sudden drop in spending would result in an oversupplied market for awhile as inventories were sold down and production idled.

Fri, 01/02/2015 - 18:47 | 5616570 Bemused Observer
Bemused Observer's picture

Umm, wouldn't a decrease in demand lead to that oversupply?

If a market is suddenly 'oversupplied', doesn't that imply that sales are not keeping pace with production, for whatever reason?

You have to keep going back up the food chain to find out what is causing what.

Since wages have been stagnant and debt levels are at an all-time high, I find it a bit hard to swallow that business is doing so well they got a little ahead of themselves and over-supplied the market temporarily...
Seems more likely that they were caught by the decline in spending, and are now 'selling down' the market in an attempt to find the proper levels. Spending can stop on a dime, but production can't be shut down overnight. So a sudden drop in spending would result in an oversupplied market for awhile as inventories were sold down and production idled.

Fri, 01/02/2015 - 18:48 | 5616573 Bemused Observer
Bemused Observer's picture

Arrgghh! A double-post! How did THAT happen? I NEVER double-post...
Wtf?
Sorry guys...

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