This page has been archived and commenting is disabled.
There Will Be Blood – Part IV
By Chris at www.CapitalistExploits.at
In today's penultimate piece on shale oil (you can catch up on the previous letters here:Part I, Part II, and Part III), Harris talks about the role of central bankers of the world in the current energy bloodbath. Enjoy!
------------------------------
Date: 20 January 2015
Subject: There Will Be Blood - Part IV
Modern central bankers are from the school of thought where there is always an eloquent academic model to approach each crisis with. Naturally, volatility is their enemy - in a highly leveraged world, volatility usually leads to dislocation and crisis. Central bankers obviously know that the halving of oil's price in a few short months adds unnecessary volatility to their carefully orchestrated worlds. What they want to do is corner the price of oil within a narrow range, suppress volatility and allow complex derivatives to be built up around it so that they can use financial means to manipulate it.
Unfortunately, oil doesn't behave like an interest rate derivative. When there is too much supply, the only way to solve the problem is to destroy supply. When there is too much demand, it is impossible to create supply - or not within the timelines demanded by central bankers. Have the central bankers finally met the first crisis that they cannot solve?
Ever since the great crash of 2008, central banks have learned that the solution to any instability is to print money and lower interest rates. This approach has been used repeatedly, because every crisis has stemmed from either a solvency issue caused by a lack of equity capital or a near-term liquidity constraint at some financial institution. As the oil crisis asserts itself, the central banks may have finally found a crisis that will not respond to their magic elixir of QE. In fact, lending more money to insolvent shale producers will only serve to increase oil supply. To the central banker with a hammer, every problem looks like a nail. This will be one well-oiled nail.
Over the past six years, investors have been treated to a false sense of security regarding the financial markets - one where they’ve learned to trust that the central banks are there to bail them out. The violence of the move in EUR/CHF shows what happens when everyone expects a central banker to support things, but the support isn't there. I think this oil crisis will be the first one to really test the central bankers globally. Too much money was lent to too many oil companies and oil producing nations - most of which cannot service this debt, much less pay it off at $45 oil. For once, the central banks have no way to save the situation - it may actually be out of their hands. When investors realize that the central bankers aren't there...
Get ready for the carnage.
------------------------------
Next week we'll have the final piece for you as well as a special subscriber-only report on specific ways to capitalize on the oil and gas carnage. Make sure you're subscribed here to receive this.
- Chris
"I'm calling a top in the Narrative of Central Bank Omnipotence because it has, in fact, reached its asymptotic limit of influence and belief." - Ben Hunt, Chief Risk Officer of Salient Partners
»
- advertisements -
All their goddamn yappin' every week has made everybody sick and tired of their bullshit.They expect investors to be following like sheep with their theory that they can talk the market through everything while their trading desks do the manipulation.Nobody trusts any of them.The average person feels that they are nothing but a bunch of F'n crooks.Until they let the market govern interest rates you won't have any recovery.And right now,all those gangsters are scared shitless about that possibility.
Well, the entire recipe for dealing with crisis in this crony capitalist world is:
1.) Bail out politically connected insiders with handsome rewards for their incompetence.
2.) Revise any economic numbers that turn ugly by writing the losers out of the calculation.
3.) Send police in to bust up the resulting tent cities.
4.) Problem solved.
This is still the recipe and won't change. Expect the Fed to buy up any bad contracts owned by TBTF banks. Look for politically connected CEOs of failing oil-patch companies to land cushy jobs consulting for mega-oil corps. And expect the displaced workers to be swept out of sight.
On the international level, Goldman will be made whole by bail-ins on any losing oil derivatives. Oil producing countries will be left to catch fire, followed by US military intervention, followed by US corporate investment in "reconstruction," followed by infestation with ISIS lunatics. Wash, rinse, repeat.
The system works if you work it.
When something is rooted in fantasy, it stays in fantasy despite all outward appearances....
You'd think the central banks would have learned to stick to manipulating the fantasy systems they've constructed. As long as they stay in game they have it fully rigged and can't lose. This attempting to rig reality to follow their constructs is when they get bitten.
Sure do miss http://theoildrum.com/ ......