"Oil Won't Stop Until The Economy Breaks"

Tyler Durden's picture

As gold strengthens on the back of the extreme experimentation of the world's (now-sheep-like) central bankers' easing and printing protocols, it does no real harm to the world, but as John Burbank (of Passport Capital) notes, the painful unintended consequence of all this liquidity is energy costs skyrocketing - and it won't stop until the economy breaks. The negative feedback loop, that we pointed to yesterday as potentially the only thing to stall a magnanimously academic response to the insolvency we see around the world (and the need for deleveraging at this end of the debt super-cycle), of oil prices into the real economy will be devastating not just for US but for EM economies, though as the bearded-Burbank reminds us - Saudi benefits greatly (and suggests ways to trade this perspective). Flat consumer incomes while costs are rising is never a good thing and while we make new highs in oil in terms of EURs and GBPs, he warns we may soon in USDs also. Summing up, his perspective is rising tensions in the Middle East combined with central bank liquidity provision are a huge concern: "We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good. It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."


Edited Transcript below:

On the price of oil and his Saudi investments:

"[Oil] is up 16%, more than any of the indices. It's a big problem for the rest of the world - central bank easing and liquidity providing presents a lot of problems for the average consumer here but also for emerging markets around the world.”

“The one market it really helps is the Saudi market. We have 15% of our capital in the Saudi market - only about 1% is held by foreigners. It should be opening up this year. So we think unfortunately QE3, which is now being pursued in Europe and Japan, essentially in the U.S. with other programs, has negative feedback loops. And oil we think is the one. Gold goes up 10%, 20%, 50%, it doesn't cause any problems with people the way banking is done these days, but oil does… I don't think oil is going to stop until the economy breaks which is a real risk."

"The average consumer isn’t doing well. Their income has been flat for almost ten years, but their costs keep rising. They had a benefit with natural gas being cheaper this year, but the oil price is now breaking out and it's breaking out because of all the liquidity in the world. The oil price is making new highs in euros and pounds and it may soon in dollars. That's a big problem."

On investing in Saudi: 

"Right now, we have to use swaps. We've been in the market for about three years. Foreigners couldn't actually own Saudi stocks until August 2008. So we've spent quite a lot of time doing our research and understanding the market.”

"[Saudi Arabia] is very sincere in opening up the market to foreigners. It reminds me of India in the 2003, 2004 time period before you could buy Indian stocks directly.  Saudi, which is 70% of the G.C.C, and by far the most important, the most liquid market, is something that foreigners are going to want to own.”

"Right now, you can't buy an ETF, you can't buy Saudi stock. It's obviously very difficult to buy a security directly. We have done that. We know that foreigners now are looking at the market. The market is about 11 times earnings with almost a 5% dividend yield in 2012, and that's on an unlevered basis. The Saudis have about $600 billion of reserves and corporates have very little debt. To me, there's a lot of systemic risk in the Western world…[but] in the Saudi market, they've been very restrictive. Banks have not wanted to make it easy to borrow money and buy stocks after the bubble that happened in 2005, 2006."

On tensions in the Middle East:

"If tensions with Iran means oil goes up, then that's good for the Saudi economy but not good for the rest of the world. Fundamentally, if there's a problem with Iran, it's a problem for the whole world…The biggest risk for Saudi is really a risk that the whole world bears, but actually Saudi benefits. Oil goes to $150, $200, it means the economy is going to grow even faster because the government has more money it can deploy in the economy."

"Saudi is not like an overbuilt economy. It's just opening up now. Building is going on. The Saudis are so conservative that they don't lend against land. "

On the European Central Bank issuing more money:

"A lot of the risk has been taken out of the market, on a near-term basis. We're actually quite bearish. The only reason all this liquidity is coming into the market is because things are really bad. It's not because things are good.”

"I don't believe in a global rally right now. It's a bounce back from oversold conditions last year. But I think the confidence in central banking is far overdone. It's hard to fight the Fed when prices are going in the other direction."

"It's hard to know where things are going to go. The point is, just because they're putting liquidity in the market doesn't mean the economy is improving."

On Passport's strategy:

"We’re stock pickers. In fact, this is a great year to be long and short individual securities.  In 2008, everything went down. In 2009, everything went up. In 2010, everything moved together and eventually ended up. Last year, things started separating. Our strategy is to be picking individual securities, companies that are not depending on economic growth.”

“Biotech and healthcare is one of those sectors. There hasn't been an obesity drug approved in over 30 years and we thought Qnexa would have a good chance of being approved…We were one of I think four big holders in the stock. We think it can double again because we think a large pharma would probably like to own the company at some point."

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battle axe's picture

ahhh, the economy already BROKE.

bogey4's picture

So are you saying the premise of the article is wrong?

battle axe's picture

Nope, I am saying that we as a country are fucked/broke and that when Israel hits Iran things are going to get a lot uglier. And as for the Ass munchers in DC, they will blame everyone but themselves. As for liquidity in the economy, say hello to a future of hyper inflation. 

bob_dabolina's picture

Things you will hear -

#1 It's not Obama's fault

#2 It's not Pelosi's fault

#3 It's everyones fault but not the policy makers fault. No way, no how, it's your moms fault before they admit to a dangerous fiscal/monetary policy which is leading to very high inflation.

redpill's picture

Some days, the day of reckoning feels closer than others.  Today it feels very close, you can almost hear it if you listen closely.

bob_dabolina's picture

I can hear some democrat saying: 

This is Bush's fault


redpill's picture

I guess it never occurred to anyone that those helicopter dollars would eventually land somewhere

Michael's picture

If I owned stock in the Federal Reserve, I'd really be seriously thinking about selling my stock right now.

The Fed is stuffed to the rafters with toxic waste and its currency is virtually completely debased.


TruthInSunshine's picture

The Bernank's (and all fractional reserve banksters) message to all debt serfs everywhere (they just keep on CNTRL + PRINTing):

It could be Barack ("he's gonna pay my mortgage and fill up my gas tank") Obama's re-election theme song, too:


Don't Stop 'Til You Get Enough - YouTube
Michael's picture

If it's because of CO2;

Without CO2, Nothing Green Would Grow On The Planet.

AbruptlyKawaii's picture

recovery summer dumb bichezzzzzzzzzzzzzzzzzz

TruthInSunshine's picture

02-24 15:15: Fed's Dudley says fiscal policy plan needed to achieve Fed'...

Fed's Dudley says fiscal policy plan needed to achieve Fed's mandate of full employment and price stability


LMMFAO BITCHEZ!!!!!!!!!!!!!!!!!!!!!

DaveyJones's picture

if the central bankers are now "sheep-like," when can we shear them?

AbruptlyKawaii's picture

policy plan needed to achieve Fed's mandate of full employment.......

fukin jeebus...reallly? holy frekin ass clap......yo mama is so fat a helicopter tried to land on her ass cause it thot she marked an X...

brokenclock's picture

Here is how you shear the banks and government in one fell swoop. The best part is it's all legal and within your rights.

Cut off the money supply. It's the only way.

First tell your employer you want to change your dependants from 1 or 3 to about 11 or 13 on your tax forms. You will have to pay the  following year on or just before April 15th, but the government will be so broke  without monthly income. Image the debt run. lol


Second, stop paying your mortgage, car payment, and credit cards. It will take 3 years for them to get around to you, then file for bankruptcy. That will stall them for another 2 years.


Take the money away and watch the system blow. very simple and all legal. Game them the same way they gamed you.



Diet Coke and Floozies's picture

Keynesian microeconomics state that a minimum wage above the equilibrium on the supply / demand curve will prevent full employment. That mandate isn't possible with minimum wage laws.

Flakmeister's picture

The logical conclusion of your argument is real feudal serfdom and eventually slavery...

Not that I find your logic flawed, just the value system that gets you there...


tmosley's picture

lol, you think that forcing people to pay other people more prevents a decline toward serfdom.

Sure, removal of freedom prevents slavery.  That's REAL logical.

If you want to claim to have logic on your side, how about you actually reason out an argument rather than just assuming a conclusion?

Flakmeister's picture

In your own words, explain the concept of Sharecropping and the overall socio-economic status of the sharecroppers?

Have you read a little history of the Great Depression and the wages paid farm workers?

Do you think FoxConn labor practices are acceptable?

Do you read any history at all?

Or do you simply arrive at a worldview based on ideological beliefs?

Based on your confusion over technical matters dealing with energy it is abundantly clear that you do not think things through. You have demonstrated an intellectual laziness where clear matters of fact exist. Why should I believe any conclusion you have reached in a far more complex subjective subject....

Green Leader's picture

I've said it before, T. Mosley is full of shit.

Jack Burton's picture

Isn't this massive liquidity dump the result of Government's attempt to rescue all the banks, hedge funds and other market players who should have been wiped out in the 2008 crash?  In order to save the speculators, the savers and the consumers had to be trown to the wolves. ZIRP killed the saver class, and consumers will be killed by liquidity driving commodities to the moon.

The people who waste key strokes complaining about "did the deomcrates do this? Will Bush be blamed? Aren't the republicans going to come to power and rescue the situation?" All that talk is rubbish!  Bush was president when this whole system crashed, Obama has been president as trillions have failed to turn around the real economy. In a simple world people would take note of this simple fact and say "Both parties serve the elite, both parties will rape the nation to save the speculators." Perhaps the hight of stupidity is to claim Obama did it or Bush did it. That is what the eltie rulers want you to say, to play a stupid game of Republican versus Democrat. All the while they rule with an iron fist and people can't even figure that out because they are blinded by the two party system, which is one party when it gets real.

CrashisOptimistic's picture

If there was to be a future history (which looks unlikely) then Bush would be acknowledged as someone with long term vision who at least tried to secure Iraqi oil for America and her allies.

Geology doesn't care about politics.  Bush may have understood that.

Flakmeister's picture

If you had replaced Bush with Cheney.... maybe...

Cheney understood it and Bush knew that Cheney knew what had to be done...

The fact that the US had to give up any claim going forward on "Moral Ascendancy" was the price paid....

shuckster's picture

It's been said that the Roman Empire was a pillage economy - it looks like that's what our Fourth Roman Empire has become - a pillage economy - only problem is the world is wising up to our scheme

LaLiLuLeLo's picture

He was fully aware of peak oil and understood that this country would fall without black gold. But Obama thinks he can do the same with Iran. SORRY! Asian countries will pay more + not bomb other countries in order to get it. The petrodollar is finished. America is over. Thanks boomers; bang up job!

Ima anal sphincter's picture

That's a pretty broad slam. Most boomers have had no choice in the goings-on with this country and world financial or geopolitics. I've been raped. I didn't ask to be raped and I didn't enjoy it. To blame boomers is wrong. So what are you "newbies" doing about it? TPTB have reamed us out. They're looking for some new tight-ass. I hope you've got some lube.

MinnesotaMD's picture

You have to admit boomers have been gloriously self-interested and hedonistic. What institutions have they courageously upheld? None that are the least bit constricting to behavior, that's for sure. America's moral, spiritual, and soon it's financial decline all fall on their watch.

Ima anal sphincter's picture

Well I guess we're a bunch of wimps. Let's see here...... the only answer to this is to rise up and slay the beast. I (we) will be counting on the fine brave "new generation" to complete this task for us lazy useless old farts. Here is some breaking news for you. Your generation and any to follow have NO CONTROL of this. If you're lucky, you'll live to be 60+. At that time I'm sure some young buck will blaming you for his "poor luck."

Until "ALL" of us decide to correct this matter, it will remain the same for a millennium. This "boomer" is ready.

Bringin It's picture

Don't play that heglian game.  It was every generation since 1913.  Entering WWI was the greatest mis-step on a path full of mis-steps.

I went thru the oil embargo.  That woke me up.  I don't know why it woke up so few.

The Navigator's picture

The "Generaltional Wars" were predicted in the 1980's, mainly based on a statisical look at Social Security and Medi-Care - the bottom line was too few paying in and too many taking out. That time is now & past.

The boomers aren't too blame - look to your government - it thought that Everything was exponential; population growth and incoming/expanding taxes to pay for all the "shiney" programs that would buy votes.

The problem is, the boomer population is a bubble. As the boomers move thru their life-cycle, they bring with it a boom and bust - schooling, housing, medicine, and hospice care. I don't blame my parents for taking out social security payments they put in - but should I blame them for living long past their expected death date and taking more in SS payments than they put in? 

It's a very flawed system designed by fools we elect that have no education in statistics, economics, or business - and then we blame each other for THEIR failings. Aim your arrow of wrath at the right party; not at each generation but at the fools we elect the design systems that always fail - Social Security, Medi-Care, war on drugs, war on poverty, war on war after war.  Don't buy into the generational war - buy into the war that is brought to YOU by your government.



DaveyJones's picture

Goes without saying, real questions are whether or not, morals and murder aside, (1) this was a good return on cost and oil spent (2) it's actually secure or ever will be (3) it created massive other security / energy costs (4) having most of your citizens and world citizens hate and distrust you is good energy policy

Flakmeister's picture

Compute the value of the oil that the US has imported since the Iraqi war (2003) that we have been able to pay with fiat paper....

Now assume that that the US could not get more than 50% of the daily imports because the dollar was not accepted...

It kept oil "cheap" for Americans and may keep oil "cheap" for a while...

If you think oil is expensive now when fiat can be converted at will, imagine it when it you need gold or some other hard asset to pay for it....

There is your answer...

Before anyone gets their panties in a knot.... I am not saying what was done was morally consistent with the ideals of the US or that it is right or even whether it should have been done...

I only outline the calculus going into that decision.... 


Here is a further gedanken:

A smart person would look at the US treasury holdings of a number of net oil importers and using the coupon rate and their level of imports, figure out what fraction of their oil they are getting for their earned dollars....What might they conclude?

DaveyJones's picture

As usual Flak, all good points ... and I could be wrong but I can't help thinking that from the largest, maybe non mathematical, historical empire perspective, still a self defeating strategy that in its attempt to put off, force off, hide or ignore the innevitable worked ironically (but histo-logically) to accelerate the decline, narrow the options (going down one path) and lessen support groups, military allies and economic friends. An army is not an economy, certainly not a diplomat and, along with drones, can't keep the petro dollar alive any more than begging and pleading or printing fiat. The nuclear cat is out of the box, our military is already stretched pretty thin, and the oil / empire problem is too big to prevent other big players from entering the game of risk.      

Flakmeister's picture

No argument...

Given the US has the abilitiy (still!!) to "print" a couple of trillion dollars and pass them off for real goods, the proper path would be massive investment in a new energy infrastructure and the attendant transportation system...

However, that was the hard path....

As I alluded to below, Peak Oil will require changing the value system of society, or we will become an insignificant species ekeing out an existence on this planet... If our technical civilization crashes too hard, it will not rise again... resource extraction has become too energy and technology intensive.... 

And at worst, we totally fry the planet in a nuclear error...

Bringin It's picture

I prefer Davey's calculus, above.  The point is you are glossing over the negatives.  I only outline the calculus going into that decision....

Flakmeister's picture

Yep... plenty of negatives...no argument there...

Objectively speaking, I think most Americans would rather some violence "over there" with the relatively few attendant body bags compared to oil shortages and hardships here.. Unless of course that you are going to argue that Americans are unlike any other peoples on the planet throughout history...

After all, out of sight, out of mind still works...

Sorry to offend your sensibilities but Peak Oil is going to be a bitch...


Please remind me what happened the last time a President even suggested that the "American way of life was negotiable"...

DaveyJones's picture

...Kind of why a Vice President said it isn't

you're right though, I think a lot of "us" know the problems but just aren;t ready to make the sacrifice. I remember about a year back debating whether there's a little Dick Cheney in all of us. He indeed is the ugly american truth. There's an excellent discussion on this in the documentary "crude awakening" ...who is going to vote for the politician who says elect me and I'll dramatically change your standard of living..because we have no other choice. Of course, great historical catalysts and heroes are usually killed because they jeopardize so many and so much. That tragedy is only eclipsed by the greater tragedy of inaction.   

Flakmeister's picture

Nicely put....

I have been through too many street fights using bicycle chains and baseball bats here at the Hedge to wax so eloquently....

DaveyJones's picture

it ain't eloquence that fix things (sorry Barack)

it's honesty then sanity

Your posts have done more than most to educate us just how insane this problem is.  

Bringin It's picture

Flak - murdering people to steal their stuff is still murdering people to steal their stuff.  I don't think most Americans would advocate that.  Certainly not the members of the US military who back non-interventionist Ron Paul with their campaign contributions to a far greater dergree than any of the other war-4-israel puppets.

Flakmeister's picture

It is all in the perception... and I ain't gonna defend anyones...

FWIW, the Vietnam War protests made the Iraqi ones seem very lame...


Bringin It's picture

Flak - here's a flash for you. Some people have scruples. Some people are guided by their morals. They have what's often called a moral compass. Have you ever heard that before? Maybe it's news to you.

Re. Viet Nam v. Iraq war protests.
Yes and a simple reason - The Draft.

Flakmeister's picture

Yes.... there was a Draft then...the protestors (males at least) were legitimately protesting that they would be called up... Iraq, nothing, because it wasn't their problem... so my point is made....

Hell, you could convince me that a draft now wouldn't be bad idea now...

My last comment...

I don't get too wrapped up about touchy feely stuff when it comes to geo-politics as History has taught me that the Idealists are usually the first to go...

And I don't make the rules of the game... I only observe and comment on the movement of the pieces....

Jack Burton's picture

I hope you led the invasion force to get that Iraqi oil that Bush so cleverly conquered. If you didn't put YOUR life on the line for the Bush oil liberation war then perhaps silence would be a good course to take when bragging up a war that killed tens of thousands, including a shit load of Americans!

CrashisOptimistic's picture

Not Bush oil liberation.  American oil liberation.

We're going to be liberating some of Hugo's oil soon, too.

ceilidh_trail's picture

Don't forget the "speculators" (and Halliburton)...

resurger's picture

Am stacking VIX

Complacency is a bitch