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The Center's Got To Give

Tyler Durden's picture




 

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

I was thinking about something along the lines of The Center Cannot Hold and Something’s Got To Give earlier, but then I thought there’s no way I haven’t used those titles before. And then it occurred to me that The Automatic Earth started 7 years ago this month. Just looked it up, it was January 22, 2008. Party next week!

Of course Nicole and I had been writing before that on the Oil Drum, who then didn’t want us to write about finance. They claimed we didn’t have the – academic, they were big on academic – credentials, as if that would ever stop me. Economists, the only people with the ‘proper’ credentials, are the last ones anyone should listen to, they engage in goal-seeked analysis only (no worries, Steve, you’re still no. 1 in our blogroll).

So we started The Automatic Earth, where we could write about what we wanted and thought needed to be addressed. In 2005 it may not have seemed important to the energy crowd, but they’ve all since seen that what we insisted on talking about back then was indeed a big event. 2007 brought Bear Stearns, and 2008 gave us Lehman. Not a minor trifle to write about in 2005. Plus, that means we’ve been doing this for 10 years already. No minor trifle either.

Meanwhile, peak oil has moved way back in the line of pressing events, the Oil Drum went so far south it’s out of sight and shale oil has just about everyone believing the peak oil theory was wrong all along. It wasn’t, not for conventional oil, which was all it addressed to begin with, but so things go. The financial casino trumped energy. But now those days seem over.

In January 2012, we were forced to move again, away from the Blogger platform, where the hacking and heckling and spamming had taken on absurd forms, from which Google refused to offer us protection. We made the mistake to move to Joomla, and it took a while to change – again – to WordPress, where we are now.

That last move cost us a lot of readers and – subscription – donors, something we’re still recuperating from today. It makes the work a lot harder, as Nicole’s long absences are testimony to. But that won’t end The Automatic Earth, and at the same time, that’s enough history. In the end, there’s nothing but forward. Best rock ‘n roll line ever, hands down: I Don’t Care About History, ‘Cause That’s Not Where I Wanna Be.

I was thinking today about Yeats’ The Center Cannot Hold when I saw European stock exchanges vs oil prices, and I wondered; are you sure about this, guys? France’s CAC40 and Germany’s DAX were up about 1.5% today, Greece even over 3%. While Europe’s Brent oil standard fell twice as fast as America’s West Texas Intermediate, diminishing the ‘normal’ $5 gap between the two to 50 cents or so. And stocks rise?

There is no way one can keep falling while the other rises. The Center Cannot Hold. I see stories about Texas homebuilders getting hit by the oil price drop, and it’s still very early innings. Sure, the price of oil will go up again at some point, but it’s the very reason it will that we should fear most, whatever it turns out to be.

It could be a war, proxy or not, it could be large scale lay-offs and defaults in the US shale patch, it could be severe civil unrest in one or more OPEC nations. None bode well for us, for the west, for its citizens. And if none of these things happen over the next year, oil prices won’t perform a Lazarus act. Or a phoenix.

That shouldn’t be all that much of a surprise. We’ve been living in cloud cuckoo land ever since the financial crisis we said back in 2005 would come, materialized. We live in a world of spin and propaganda and embellished numbers , and we’ve come to see them as a new normal. It’s the 55% drop of price of oil that is the first sign that central banks don’t control the universe, or the world, or even our own lives.

But, judging by those European exchanges, we’re still not listening, or keeping an eye out. We see signals, but we don’t recognize them, we don’t know what they mean. Like this little tidbit from CNBC:

Here’s Why Oil Is Such A Problem For Corporate Earnings

On December 1st, analysts anticipated that Energy earnings for Q1 2015 would decline 13.8% compared to Q1 2014, according to S&P Capital IQ. As of Monday, analysts expected Energy earnings for Q1 2015 to decline 41.0%. Think about that: in 5 weeks, earnings expectations for the entire Energy group have gone from down 13.8% to down 41.0%.

 

Q1 earnings for the Energy sector were cut by $7.7 billion from December 1 through today. The S&P 500 as a whole saw a cut of $9.1 billion during the same period. So Energy is $7.7 billion/$9.1 billion = 84% of the decline in the dollar value of the earnings decline we have seen in the past five weeks. See why the market is so focused on oil for the moment?

Methinks the market is not focused nearly enough on oil. Yet. Though numbers like that should be cause for pause. Especially combined with the knowledge that most other numbers, GDP, jobs, you name them, are nothing but shrewd spin jobs. And, lest we forget, that the Fed no longer supplies free lunch. That the Fed has a plan. A plan that will benefit its owner/member banks, not you and me.

In all likelihood, the oil mayhem will start blowing up in proxy territory, perhaps Turkmenistan, perceived as a possible wound to Putin, perhaps Bahrain, where the Saudis have been interfering militarily for quite some time.

Thing is, that whole line about how lower oil prices were going to be a boost for our economies was ignorant from the start. And there’s still plenty people believing just that. That may explain those EU stock exchange gains. That sort of thing all comes from people who don’t understand to what extent oil is pivotal to our societies.

That we would be lost without it. And that dropping its price by 55% and counting will make the machine run a lot less efficiently. Think of what you pay for oil and gas as the grease that keeps the machine running. Not the product itself, but what you pay for it. We just took away a lot of grease. And you know what that does to a machine. When oil drops, so do many people’s wages, and jobs. And then businesses start to close. And we enter deflation. And more businesses close. And more jobs are lost, and more wages squeezed. Ergo: more deflation.

It’s not yet too late, but ask yourself: can the machine run for, like, another year with this diminished amount of grease? Or with even less, what if oil falls to $40, or even $30? Bad for Texas, devastating for Alaska and North Dakota, and terrible for many Middle Eastern nations that have so far been our friends and allies (even if they don’t exactly espouse the ‘values’ we so proudly proclaimed at the #JeSuisCharlie promo events). What if they turn on us? The way ISIS did?

But that’s not our biggest, or most immediate, concern. We’re not in 2008 anymore, when an oil price drop actually helped us crawl out of a tight spot. We’re $50 trillion down the road, and there won’t be another $50 trillion, or another road. For all intents and purposes, we are the center today, and we cannot hold this way.

 

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Wed, 01/14/2015 - 18:52 | 5662277 Soul Glow
Soul Glow's picture

Moar trillions!

Wed, 01/14/2015 - 19:12 | 5662361 knukles
knukles's picture

Center ain't there to hold.

Riddle me this.  Out here in Never Never Land, all of the grocery stores are having sales on just about everything.  Little red and yellow and pink stickers on over half the store, everything marked down, 2fers, whatever.  Noticeable.
Last weekend I picked up a full (uncleaned) vacuum sealed fillet mingion for $9.99/lb.
And no, I usually don't even think about eating like that.  Can't afford it.  Likewise, regular boxes of cereal, $1.49.  6 pack Vernors ginger ale, $2.99 down from $4.00.  Guys, there ain't any big nasty food inflation out here on sale days and everything's on sale.

Sorta reinforces the deflation theme.
No money, no lottery tickie

Just an observation.

Wed, 01/14/2015 - 19:25 | 5662416 Winston Churchill
Winston Churchill's picture

I was given four full mignon's as a present from a client at xmas.Prolly $150 each.

Wouldn't dream of spending that for a glorified pot roast, and I prefer rib anyways.

Wed, 01/14/2015 - 19:32 | 5662437 LawsofPhysics
LawsofPhysics's picture

We butchered another angus steer for X-mas in Deer Valley.  Very, very good X-mas.

 

But I digress.  As to the topic at hand.  Be very mindful of the historical record and just how fast "low prices" can turn into shortages.

 

"Piva pozhaluysta!"

Wed, 01/14/2015 - 19:36 | 5662470 disabledvet
disabledvet's picture

I prefer just plain pot...although some quality weed from time to time is okay.

 

I did eat another guy's French fries the other day.  He bought him for his hot, drunk girlfriend...but she was kinda snotty.

I picked up on the cue and started nibblin'...he nodded and we both had a laugh.

 

Ten bucks for those fries!

 

Oh, yeah..."freedom fries" alright.  Don't even get me started on a bottle of Budweiser.

Wed, 01/14/2015 - 18:55 | 5662293 readyforit
readyforit's picture

Bitcoin?

Wed, 01/14/2015 - 18:58 | 5662299 Soul Glow
Soul Glow's picture

What's that?

Wed, 01/14/2015 - 19:02 | 5662316 Ginsengbull
Ginsengbull's picture

That's how they used to check if money was counterfeit.

 

They bit the coin, and if it was lead, it would leave a dent.

Wed, 01/14/2015 - 18:58 | 5662304 Consuelo
Consuelo's picture

"We’re not in 2008 anymore"

Yes we are, because you're spouting the same deflationary doomsday scenario that you proffered in 2008...!!!   And the result will be the same - You Lose, the Fed wins - for now.   Take heart though, we're all going to be losers when the currency crisis arrives, it's just how we get there that seems to be lost on short memories...

Wed, 01/14/2015 - 18:59 | 5662306 swmnguy
swmnguy's picture

None of this has anything to do with oil.  It has to do with Finance. It isn't oil that's bought and sold on the world markets.  It's abstract paper contracts for hypothetical oil.  The fact that the price for those contracts has plunged indicates that there is a glut not of oil, but of paper.  For those whose business actually is in buying and selling of actual oil, that's a huge deal.  But that trade is dwarfed by the trade in paper.

Of course, divergence between those two markets can only last for so long, because the trade in actual oil is incredibly important to the modernized way of life.  But we are in a period of divergence.  If $140/bbl was a reasonable market price, then $45/bbl is not, and vice versa.  Therefore, when we talk of prices being set by supply and demand, it isn't supply and demand of oil.  It's supply and demand of paper.

Wed, 01/14/2015 - 19:08 | 5662349 XqWretch
XqWretch's picture

Exactly, and Raul is probably on the wrong side of a bunch of contracts and is bitching about it or trying to get people on the wrong side of the fence to ease his pain. Either way, he certainly wont shut the fuck up about this topic already.

Wed, 01/14/2015 - 19:29 | 5662434 kowalli
kowalli's picture

He just don't know about prequel

Wed, 01/14/2015 - 19:33 | 5662457 LawsofPhysics
LawsofPhysics's picture

Bingo.  Caution, historically, "low prices" can turn into "shortages" pretty fucking quickly.

Wed, 01/14/2015 - 18:58 | 5662308 Ginsengbull
Ginsengbull's picture

Oil is still overpriced.

 

It only costs $2 to pump a barrel of oil from the ground.

Wed, 01/14/2015 - 19:04 | 5662344 Uber Vandal
Uber Vandal's picture

I miss the days of Mathman stating that it costs $5 to dig silver out of the ground.......

Thu, 01/15/2015 - 00:47 | 5663543 Ginsengbull
Ginsengbull's picture

I dug a lot of that out from under the seats of cars in a junkyard in the 1980's.

Wed, 01/14/2015 - 19:02 | 5662318 jovius
jovius's picture

It's not Yeats' The Centre Cannot Hold, it's called The Second Coming.

 

The title is a key part of the whole poem.

Wed, 01/14/2015 - 19:35 | 5662467 Urban Roman
Urban Roman's picture

Slouching toward Bethlehem, almost 100 years later. The poem was prescient.

The Second Coming was written in 1919 in the aftermath
of the first World War.

 

Wed, 01/14/2015 - 19:40 | 5662490 disabledvet
disabledvet's picture

And why does a guy who can't stand history quote a rock and roll lyric from thirty years ago?

 

Besides..."I know its only rock and roll but i like it (oooo-yeah)" was the best rock and roll lyric ever.

They even had a chord change in that song....

Wed, 01/14/2015 - 19:02 | 5662323 Dragon HAwk
Dragon HAwk's picture

When speculators Drop a Commodity they will surely pick it back up when it starts to rise again.

Wed, 01/14/2015 - 19:04 | 5662340 SameAsItEverWas
SameAsItEverWas's picture

In January 2012, we were forced to move again, away from the Blogger platform, where the hacking and heckling and spamming had taken on absurd forms, from which Google refused to offer us protection. We made the mistake to move to Joomla, and it took a while to change – again – to WordPress, where we are now.

BOO HOO!

Wed, 01/14/2015 - 19:04 | 5662341 imapedestrian
imapedestrian's picture

This article sucks.  The center will not hold?  Horribly written and incoherent.  Zero Hedge is a mere shadow of it's former self.  

We all know that life sucks in Texas and is shale country.  I live in San Diego.  It is a big city. I have relatives in Los Angeles...an even bigger city.  Low gas prices are a total boon to the economy here.  My neighbors who both work and communte are saving $400 per month on gas!  I'm saving close to $200.  If we import 40% of our oil, then that is $80 per month LESS from my pocket going to some Muslim terrorist state (Qatar, Saudi Arabia, etc.).  Instead I'll spend it here in the USA...probably in services and vacation and travel.

Wed, 01/14/2015 - 19:04 | 5662343 imapedestrian
imapedestrian's picture

This article sucks.  The center will not hold?  Horribly written and incoherent.  Zero Hedge is a mere shadow of it's former self.  

We all know that life sucks in Texas and is shale country.  I live in San Diego.  It is a big city. I have relatives in Los Angeles...an even bigger city.  Low gas prices are a total boon to the economy here.  My neighbors who both work and communte are saving $400 per month on gas!  I'm saving close to $200.  If we import 40% of our oil, then that is $80 per month LESS from my pocket going to some Muslim terrorist state (Qatar, Saudi Arabia, etc.).  Instead I'll spend it here in the USA...probably in services and vacation and travel.

Wed, 01/14/2015 - 19:25 | 5662424 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

fuck you californians...when is the big one coming? 

Wed, 01/14/2015 - 19:07 | 5662345 Fun Facts
Fun Facts's picture

Lower oil prices are good for the people, not for wall street.

Given that the interests of the people and wall street are a mutually exclusive set, this makes perfect sense.

Send a memo out to the retards at CNBC on that one.

Wed, 01/14/2015 - 20:23 | 5662649 Tzanchan
Tzanchan's picture

Venn diagram between Occupy and Tea party would find the middle there much agreed upon, but Steve Douchie and Rachael Muddow can never admit it. Keep stackin that silver, big blowup coming, remember to buy a couple pounds of lead now and again too.

Wed, 01/14/2015 - 19:08 | 5662346 Handful of Dust
Handful of Dust's picture

I've read the restaurant business sector is already bracing for some serious slowdown in O&G states. When you have no job or are worried sick about the one you have, you are not going to fork over $12 for a burger, fries, and drink.

Wed, 01/14/2015 - 19:10 | 5662359 XqWretch
XqWretch's picture

"When oil drops, so do many people’s wages, and jobs. And then businesses start to close. And we enter deflation. And more businesses close. And more jobs are lost, and more wages squeezed. Ergo: more deflation."

Is this guy fucking serious? Guess what, oil never should have been priced at above $100 a barrel to begin with, so all those jobs and wages you are bitching about were existing in an artificial environment. Shut the fuck up already!

Wed, 01/14/2015 - 19:34 | 5662456 kowalli
kowalli's picture

yeap, but mb he is from oil company and want 500+% profit

Wed, 01/14/2015 - 22:52 | 5663218 TuPhat
TuPhat's picture

You got it Xq.  "We cannot hold this way,"  well we sure weren't holding with oil above $100 a barrell were we.  Get off the low oil price is the problem meme.  Just because a few people had good jobs that they have now lost doesn't mean the economy was good and now it's gone bad.  Things are just bad all over and have been for quite a while.

Wed, 01/14/2015 - 19:11 | 5662366 Thisisbullishright
Thisisbullishright's picture

Flag thrown....  Holding....10 trillion yard penalty go right to 4th down!

 

Wed, 01/14/2015 - 19:14 | 5662377 imapedestrian
imapedestrian's picture

Who is this Raul guy?  And what makes him any kind of authority on markets!?

Listen...this is a supply shock.  Pure and simple.  It is good for the overall economy.  High commodity prices help no one except those who sell them.  Gee, do you think that there was some speculative leverage in the system, using free monet to hold commodities in a contango?  With the prospect of the free money coming to an end it is now a game of who can liquidate and return their borrow first.

Lower commodity prices realized will lead to better NPV on various projects related to value added technology developments.  Infrastructure that is badly needed here makes more sense to do now.  

Sure, current earnings will be hurt overall.  However, we will also here glimpses of other companies that use raw materials making noises about commodity tailwinds going forward.

Wed, 01/14/2015 - 19:29 | 5662440 Urban Roman
Urban Roman's picture

-1 for 'listen'.

Wed, 01/14/2015 - 19:38 | 5662474 Fuku Ben
Fuku Ben's picture

7 hmm, what a lucky number

7 Heavens? Wasn't it 1 and 1 true path?
7 Large rings of Saturn
7 Deadly sins
7 Gates of Hell
7 Christine Lagarde
7 Heads of the Hydra
7 Doucheboo7 (YT channel for alleged truther)
77 London Bombing
77 Flight #77 Crashed into Pentagon on Sept 11
77 Washington DC on 77th Meridian
77 GW Bush multiple including his ship http://ep.yimg.com/ay/militarybest/uss-george-h-w-bush-cvn-77-ships-ball...
77 Anders Breivik, Norway killed 77 people
77 Doucheboo77 (2nd YT channel for alleged truther)
777 Vegas Slots
777 Alister Crowley books
777 Boeing Uninterruptible Autopilot
777 Doucheboo777 (3rd YT channel for alleged truther)

& 7 Years of ..... luck? Who's luck?

I'm sure the 7's associated with bad to evil things are all just coincidence because 7 is a lucky number, right?

Wed, 01/14/2015 - 19:41 | 5662492 Pure Evil
Pure Evil's picture

Truth is in the eye of the beholder.

Wed, 01/14/2015 - 20:08 | 5662595 dlfield
dlfield's picture

That could have all been said in 1 sentence.

Wed, 01/14/2015 - 20:20 | 5662638 Tzanchan
Tzanchan's picture

A big LA Boo-Yah for that! And tell In-n-Out we need 'em here in FL, secret menu and all....

Beef is a petroleum byproduct so those mighty tasty burgers oughts be cheaper too!

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