"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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rsnoble's picture

I am going to be FUCKING SHOCKED if the DOW doesn't close above 13k. Why? Are you kidding me!!!! It's FRIDAY!!! That goes against all playbook rules.  In fact I would almost be tempted to call it a top if this market doesn't close above 13k today.

The Count's picture

Check out this story. Happened at the britisch parliament just this morning. Totally ignored by everybody even though it appears to be a huge rogue financial transaction.

http://www.youtube.com/watch?v=eL5hqvTWkYg&feature=player_embedded

 

 

rsnoble's picture

Did you see the people falling asleep while he was talking? LOL.  Could be a huge thing. That's the problem these days.  Of course a lot of people are  just plain burnt out.

Dr. Kananga's picture

Yohannes Riyadi strikes again:

http://www.ny.frb.org/banking/frscams.html 

 

I wonder if Lord James is aware of the Lads from Lagos?

http://www.scamorama.com/

The Count's picture

Thanks for those links.

plus...

 

Scam Involving Yohannes Riyadi and/or Wilfredo Saurin
November 2007

The Federal Reserve is aware of a fraudulent scam involving individuals using the names Yohannes Riyadi and/or Wilfredo Saurin, or persons claiming to be representatives of these two men. In a typical version of this scam, Mr. Riyadi and/or his delegates falsely claim that they have on deposit with the Federal Reserve Bank of New York several U.S. Treasury Checks issued to Mr. Riyadi amounting to billions of dollars.

The Federal Reserve Bank of New York has been contacted by several brokers and financial institutions worldwide inquiring about the validity of this fraudulent account documentation, which is being offered as collateral for lines of credit or other types of asset based financing. The fraudulent scheme includes multiple documents which purport to have the signatures of various Federal Reserve officials, including Chairman Ben Bernanke.

In some instances, individuals involved in this fraudulent scheme claim to have met with Federal Reserve officials and claim to have verified that the alleged account is in order. We have also learned that the fraud may include the purchase of certain documents by the introducing brokers.

If you have information regarding this fraud please contact either Robert Amenta, Special Investigator at the Federal Reserve Bank of New York, or Erik Rosenblatt, Senior Special Agent at the Department of Homeland Security, Immigration and Customs Enforcement.

Moneyswirth's picture

And, right on cue...

Atomic Agency Says Iran Is Making Fuel at Protected Site

Fire up the printing presses! Beat them war drums!

 

Money 4 Nothing's picture

And Leon Panetta just said publicly the other day that Iran is not building a nuke bomb.. go figure?

mantrid's picture

yeah yeah and the houseing prices will be rising for the next decade or two..

spekulatn's picture

I like Mr. Burbank. No bullshit detector needed when he talks. Well done, sir. 

 

Great stuff ZH.

alien-IQ's picture

Week 8 of continuous /ES rising now complete. Week 9 coming up? Is that a record?

Dingleberry's picture

Oil.....like gold and food and other commodities.....won't stop UNTIL FUCKING BERNANKE AND THE OTHER FUCKING CENTRAL BANKS STOP PRINTING LIKE MAD.

earleflorida's picture

"Inbred Oil Kings; Bush-League Crime, and the End of the Energy Oligopoly"

http://www.tariganter.wordpress.com/2011/09/17/inbred-oil-kings-bush-lea...

Ps. Dean Henderson's, Tarig Anter site gets many views from "Me`eow" --- always controversial reads, but great, ' between-the-cover' story escapades, that fall somewhere in-between nerve-racking and disbelief,... but well within the confines of reality  

"Absolute Monarchy's" ___ http://www.cia.gov/library/publications/the-world-factbook/fields/2128.html   *{please note you must go-to-sidebar_world-facts which besides the FOIA releases has all the data,... or just Google --- sorry bout link :-(

}    Check out the individual countries in the ME belonging to the "GCC", and say it ain't so?

Village Idiot's picture

Anyone catch his comments on that drug stock.  I know that stock and have some knowledge of its use. An MD buddy of mine with a practice in the weight loss space has been using the two drugs that are essentially combined to make the drug this guy is referring to, for about 13 years.

My buddy has a position in the stock and has been closely monitoring the drug move through approval.  Once approved, it will quickly become the go-to in the weight loss space with really nothing else on the horizon for a while.  Watch it...

ItsEvolutionBaby's picture

There is this brand new diet coming out that is going to shit all over that.

It's called the "No Eating" diet.

This diet is voluntary, but i think a lot will be involuntary.  

khakuda's picture

Like clockwork, Bernanke opens the spigot, spikes commodities and induces a slowdown.

They should be playing Britney Spear's "Oops I did it again" everytime he speaks.

NEOSERF's picture

With real incomes declining, we all have essentially jumped into the same lifeboat as the retired...we are all in fixed income now and feel the same pain.

Shizzmoney's picture

"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."

 In other news, Bears shit in the woods.

But seriously, the consumer has been lucky in one aspect: the warm weather.  Consumers can take on a gas hike; they CAN'T take on a gas hike AND heavy oil usage for heat during the winter.

Where this may pop up again is in the summer.  If we have a super hot summer, that means alot of fans/air conditioning/enegy usuage rising.  That leads to a higher bill from your utility company, and add that with $5 gas = disaster for discretionary incomes

Westcoastliberal's picture

Just back from a little shopping trip & Tuesday regular gas was $4.09; today's it's $4.29 (ex-urban Sou Cal).  You can almost smell the fear in the air here since 50% of the residents commute to the city daily.

Yes_Questions's picture

 

 

somehow I don't think the fear is from the gas prices.

Yen Cross's picture

CAPTCA might work Tyler. Basic " Numerical Values", are a _+

JJ McApe's picture

Ok i just give you a small rundown about where i live. (central Europe)

Fucking gas prices are out of control.

Almost 1,6 Euro per Litre (not a gallon like in the US). Thats like 70-80 Euros for a tankful. Thats about 100 $ right? I mean that's just crazy. And most of product goods are transported via trucks so the high prices will hit you even if you have no car.

The prices in the supermarkets are like 30% higher like 3 years ago. Energy and living expenses, please don't ask...

Everytime i go and buy some food and stuff i pay almost 35 Euros. The expenses are fucking high.

I just take in consideration to give my car away bc its so expensive. Fucking hell man, that sucks.

Peace out wish everyone the best. God bless!

Yen Cross's picture

Plus Infinity, my new friend. Is that " Brent spread" e'fecting YOU? Tell the truth! I just witnessed that GBP (bounce).

  I'm trading well beyond you. Tell the English Truth!

bigwavedave's picture

--- Building is going on. The Saudis are so conservative that they don't lend against land. "

 

I think he meant to say 'sand'

SAT 800's picture

"Oil won't stop until the economy breaks". No one knows. the statement is merely conversation. there are important reasons related to market realities to believe the price will come down rather than go up. Don't be seduced by conversation that satisfies your emotional needs.

Money 4 Nothing's picture

Who bought our SPR at auction for $115.00 per barrel? Were going to pass that number and then some so JP Morgue makes a killing selling our own oil back to us. $150.00 per barrel will arrive. Search: Dept.of energy Secretary Chu calls for $8.00 + per gallon for gasoline. Now you tell me.Were screwed, and he stated that fact.

 

Here is a good link.

 http://blog.heritage.org/2010/04/01/morning-bell-dont-fall-for-obamas-energy-shell-game/

Chu statement. http://amac.us/amac-tells-gop-candidates-seniors-feel-the-pain-of-president-obamas-energy-policies

Yen Cross's picture

 Can you feel it? ))))))?

elderstew's picture

It's an old, old story. It was ever thus. Take pride that you've served your purpose, then try to relax into things as best you can. The pain you feel is only temporary, it will be all over soon enough.

http://dieoff.org/page137.htm

By the time individuals discover that remaining resources will not be adequate for the next generation, the next generation has already been born. And in its struggle to survive, the last generation uses up every scrap, so that nothing remains that would sustain even a small population.

The human species may be seen as having evolved in the service of entropy, and it cannot be expected to outlast the dense accumulations of energy that have helped define its niche. Human beings like to believe they are in control of their destiny, but when the history of life on Earth is seen in perspective, the evolution of Homo sapiens is merely a transient episode that acts to redress the planet's energy balance.

Atomizer's picture

But CNBS tells us that higher oil prices represent a recovering economy. <LOL>

Just wait until the fuel surcharges begin to take effect. The corporate retail industry will be watching tumbleweeds pass their store front properties. bahahahahahahahaha!

Money 4 Nothing's picture

Fux CNBS, they get all exited reporting that oil futures are rising. They consider it "Grenn Shoots" ... Losers. And in the mean time, their tearing out tracks and blocks of housing in Illinois to get Forclosures off the books just to rebuild new in the place of, kinda redundant, but makes the books look good. Stop the Economy, I wanna get off.

Like I have mentioned before, they don't want to ruin the stock market, they want to destroy our economy till masses scream for change, and boy will we get it. Stay tunned. Work everyone into the ground with longer hours, lower wages along with higher taxes and commodity prices is a recipie for disaster.

Expensive gasoline = economical recovery? Bullshit. This whole Ponzi economy is being brought to an end in my eye's. Crash and burn.

jomama's picture

i'm in the biotech industry and knew about the VVUS stock on Monday... but i can't trade stocks anymore.  got wiped out on that fucking racket in my 20's, and have been turned off to the market ever since.

MinnesotaMD's picture

You are in luck. There is no free market in most things.

Alpacanio's picture

The two things amaricans will wake up to is #1 Food shortages and 2 High gas/energy prices. And both can walk hand in hand.

Bad juju coming. Many crazy and bad things will involve in the coming months. I'd say we are one preview way from the main feature. BTW tonites feature is Titanic!

q99x2's picture

It makes sense that the liquidity that is being pumped into the world economy is driving markets. But it doesn't account for low volume and flatline. Those two characteristics are more likely due to direct manipulation by the central banks. By direct I mean that some of the algos in the markets (since around Nov 2011) are owned and operated by the central banks. As such liquidity doesn't just find its way to the market it has become the market and may be adjusted directly by the central banks. The markets can now be used to distribute money to or take money from market participants on a granular level. The Fed has found an alternate way of dealing with things other than to just throw money into failing banks and thereby drive up asset prices. I'm always suspicious when I hear big money men reasoning out loud.

samcontrol's picture

i have a vxx optin until march 16.  I think i fucked up, this won't blow till after the elections.

octafinance's picture

The fund of John Burbank had 18% loss in 2011. Not sure, how serious we should take his words... Passport Capital Performance http://johnburbankblog.blogspot.com/2012/02/passport-capital-performance.html