"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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UP Forester's picture

I like the smell, really clears up the congestion, too....

Deo vindice's picture

Oil is heading skyward. Gold and Silver pretty much flat.

No manipulation here folks. Let's all just move along.

MinnesotaMD's picture

I heard they are proposing closing proprietary silver markets with the Volcker Rule come July. If the markets don't tell a good story, I guess there will be no market. Then the silver bugs (like myself) can never cash in on the wisdom. As if market forces aren't at work whether it's legal or not.

Hmmm, black market silver would be priced at a premium though....

Mr Lennon Hendrix's picture

So you're saying today is a good day to rob the train?

Dcheeth2's picture

Only if the train company can afford the diesel to make the train run. 

Dr. Richard Head's picture

That could explain my uber jovial mood today.....or perhaps it's the liquid lumch.  Hic.

Piranhanoia's picture

Why put your favorite "I hate this face" slant on what you know is a money machine that dictates policy to everyone in government?  Is it your intention to change the subject?

Bob's picture

Nah, couldn't be! 

What it seems to be is a religously fervent compulsion to blame government rather than corporatized greed that business type loyalists just can't stop themselves from indulging, imo. 

The guys who spread their feet extra wide at the urinals in every men's room . . . like they just got too much to contain.  They're like that everywhere they go. 

Seems to be nothing more than a breed. 

DosZap's picture

battle axe

Nope, I am saying that we as a country are fucked/broke

Newsflash, the ENTIRE world is in the same boat.................................WE are all on the Titanic.

DoChenRollingBearing's picture

Nailed it!

+ .338 Lapua

What's left besides gold?

Green Leader's picture

Seeds, agricultural skills and calcium carbonate.

Deo vindice's picture

The title of the article makes the false presumption that the economy isn't broke. Huh?

mayhem_korner's picture

 

 

The title of the article is a QUOTE.  Press the little sideways triangle in the box and see what happens.

Deo vindice's picture

I did. Wow! Like magic.

I listened to it as well.

The point remains whether the title is is a QUOTE or not, it is still the title of the article.

If we want to split hairs in the cause of accuracy then it could be titled:

"Burbank says 'Oil Won't Stop Until The Economy Breaks' ".

Methinks you missed the sarcasm of my original post.

mayhem_korner's picture

 

 

Methinks you need sarcasm lessons.

Deo vindice's picture

Are you being sarcastic? ;-)

CrockettAlmanac.com's picture

I don't know about the rest of you but I'm being completely serious. Really.

maxmad's picture

"Crack is Whack!"

 

-Whitney Houston

CrashisOptimistic's picture

There is time for Obama to act on the SPR.  There is time for Chavez to die and open up about 250K bpd of very short term flow increase to Obama liberating it.

But geology cares about neither.  If geology has asserted itself and choked off the liquid that is actual refinable crude, then there's nothing he can do.

LFMayor's picture

and here I thought it was all the drugs she did.

StychoKiller's picture

The worst drug to be found in Hollyweird:  FAME!

Money 4 Nothing's picture

Bobby Brown is an Illuminati member?

mayhem_korner's picture

 

 

Speaking of which, any reports on whether inflation is creeping in to the black market narcotics business?

faustian bargain's picture

Well, we do know that demand recently took a dive, so...

yabyum's picture

Nope a nickle baloon of smack is still five bucks. However, with the amount of abscesses we are seeing in the ED I think they are cutting it with dog shit.

aphlaque_duck's picture

It will really be something when the drug cartels start to demand gold.

StychoKiller's picture

Users of the "product" have to have some Au to trade with, first!

DoChenRollingBearing's picture

@ mayhem

+ 1

That's an interesting question (I have no idea what the answerr would be), let's hope that someone here can tell us.

Squid Vicious's picture

Heard on the floor of the Nymex: Peak Bitches Oil!

Silver Dreamer's picture

Not that I follow pop culture at all, but Whitney had everything going for her until she hooked up with Brown.  Sure, she's responsible ultimately, but hanging out with or falling for losers certainly doesn't help your odds in life.

MinnesotaMD's picture

Like Greece getting debauched by Germany. They are hooked on crack too I guess.

nmewn's picture

Famous last words.

But probably too soon ;-)

UP Forester's picture

....and here I thought "famous last words" were "Hey, hold my beer and watch this!"

JennaChick's picture

Read a weekly commentary of Armada Markets 3 weeks ago. In it they said that short EURCHF and long USDJPY are the trades of this year. I was an idiot that I didn't pull the trigger. 

TheFourthStooge-ing's picture

Read a weekly commentary of Armada Markets 3 weeks ago. In it they said that, although they paid a fine, they admitted no wrongdoing.

I was an idiot that I didn't pull the trigger.

Be sure to point the gun at your head when you do.

 

slaughterer's picture

The playbook right now really seems to be:

long crude

short consumer discretionary

But at what WTI price does the economy "break"?  $140?  $200?  I agree with the premise, but the word "break" needs more definition. 

Dr. Richard Head's picture

Considering a $143.74 peak on July 2, 2008 http://ycharts.com/indicators/crude_oil_spot_price

And considering the government inflation

http://www.usinflationcalculator.com/

I would garner a guess at $151.32. Perhaps May of this year if recent history is any guide.

slaughterer's picture

Thanks Dr. Head.  That was a very satisfying, because properly quantified answer. 

Dr. Richard Head's picture

Of course it is just an educated guess based on historical evidence, but I would eye that level myself.  It sure was the straw that broke the camel's back last time through.

DaveyJones's picture

good stuff, of course it's really ticky isn't it? The reliability of those providing supply and depletion rates. How long the world will value the dollar and whether or not that will be a gradual or "explosive" adventure and other fun stuff 

shuckster's picture

Once the Saudi Princes start getting whacked, that's when you'll know that these fools are playing for keeps 

 

Oil? Why not $500 a barrel - or perhaps, it will become more efficient to burn money than oil.. who knows

Ruffcut's picture

I thought a black swan was a white swan covered with oil.

Hippocratic Oaf's picture

This guy would have been cut off mid sentence on CNBC with........."Now let's go to Cramer with an interview with The Oracle and behind him, Becky Quick"

Freddie's picture

Hope & Change negative feedback islamo-marxist loop.

Freddie's picture

It is a shame that the Orifice from Omaha was not in the bath and someone threw a hairdryer in the tub.