Dec 102014
 December 10, 2014  Posted by at 10:03 pm Finance Tagged with: , , , , ,

Christopher Helin Fisk Service garage, San Francisco 1934

Interesting – if not outrageous – remarks today from Steen Jakobsen at Saxo Bank in Denmark, always good for some fresh insights, and a statement from him that I would like to decorate with a few question marks. As WTI oil looks threatening to break through $60 a barrel with another 5% loss today, let’s first take a look at Saxo’s, and hence Steen’s, Outrageous Predictions, via Tyler Durden. We can take it from there.

Saxobank’s 10 Outrageous Predictions For 2015 – A Reckoning’s Coming

Low volatility has given investors a false sense of security that could lead to the biggest upset in 2015. Central bankers meanwhile have become the generals in an economic war in which the final tool in the box – competitive currency devaluations – merely exports problems overseas. Nowhere exemplifies this better than Japan after the latest bazooka launch by Shinzo Abe threatens to become an out-of-control, inflation-stoking missile. Japan may have bought the global markets a further quarter or two of protection but the real world will have its say.

We saw it for one week of mayhem in October. If that’s anything to go by, we are in for a rollercoaster ride in 2015. Tangible assets and production sit at all-time lows. Paper money investment has crowded out productive capital while societies are dominated by hairdressers and bankers. We’re losing the art of manufacturing. Meanwhile the power of the US of A is waning as China rises and when the superpower pecking order changes, volatility and war ensue.

Nothing is ever given and Outrageous Predictions remains an exercise in finding ten relatively controversial and unrelated ideas which could turn your investment world upside. And we at Saxo Bank remain convinced higher volatility and a potential move towards a mandate for change is upon us as macro thinking enters a final fight to the death before we can again put our faith in people, ideas, education and change rather than hollow promises. 2015 will be a tough year but potentially also the year we look back at as the nadir.

That’s the intro, now let’s get to the predictions themselves, and I’ll give my version.

10 Outrageous Predictions…

• Russia defaults again

Possible, but I wouldn’t want to rule out Russia’s preparedness for what is happening today. They’ve seen the neocons coming from miles away, and they surely have considered today’s reality in their planning. But, again, a default is possible. If Putin thinks it’s a smart thing to do.

• Volcano eruption decimates crops

That’s not really a prediction, it’s more of a crazy wager made at 11.59 pm on New Year’s Eve after a few bottles of bubbly.

• Japanese inflation to hit 5%

That would not only mean a great success for Abe, Kuroda and Abenomics (which has been an abject failure to date), it would also mean they find a way to get the Japanese people to start spending like a bunch of Jewish American Princesses, and I really can’t see that. So a no for me.

• Draghi quits ECB

Absolutely. Draghi is stuck between desperate spend spend spend forces on the one side and the Germans on the other. It’s clear he would love to do the former’s bidding, but the Germans really don’t want anything to do with it, and that’s not because they’re traumatized over what happened 80 years ago in Weimar, a silly argument thrown around far too easily. They simply don’t believe in letting debt take over an economy and hold it hostage, which is what the rest of the world is doing.

Interesting question is who’ll succeed the future Italian president. Another Goldmanite like Mario would appear useless, it would just lead to another case of being stuck in a Mexican stand-off. So a more Berlin-friendly chair? Germans have no room to move, if they go for broad asset purchases, they’d be voted out of office and voted down by their domestic court system.

My guess would be that if and when Mario leaves, the EU has a big problem, because a replacement that everyone can agree on will be hard to find, And that in turn may be a danger to the union itself. Which it should be too. It’s an unholy union between partners that are far too far apart from each other.

• Corporate bond spreads to double in 2015

Entirely possible. What’s happening today with oil is already affecting other commodities, and will spread to stocks sooner rather than later. Bonds can’t be far behind, be they sovereign, corporate or just plain junk. Wash out, bloodbath, pick your favorite term.

• Internet hacks smash online shopping

Perhaps. Hackers seem to be more focused on ‘loftier’ goals for now, but who knows? Who knows where the main hacker communities are located in the world to begin with?

• China devalues yuan 20%

I’m guessing Saxo means a deliberate move here, as in an announced one. And I’m not sure they’d need that. They can do it by stealth. It matters of course whether you mean devaluation vs the USD, or another currency. They probably mean the USD, and then it’s not so hard. I wouldn’t be at all surprised if the euro loses another 20% vs the USD in 2015, the yen seems a given, so why not the yuan? Lots of dollars will be looking for a way ‘home’. The question becomes: can the Fed still drive the dollar down?

• Cocoa futures hit USD 5,000/tonne

Now I’m outta my league. I’ll have to pass. I do know, of course, that chocolate has been threatened for a while, but that’s the extent of my ‘expertise’.

• UK house sector to crash

Along with quite a few others. Central banks have focused on housing in Australia, New Zealand, Canada, the US itself, and all these markets are facing a lot of pressure. The UK may be even crazier than all the rest, London surpassed Hong Kong as the most expensive city only recently. Which is where my thoughts turn to all the Londoners who’ve been chased out of their own city by the insane dreams of Cameron and Boris Johnson. They are the ones who should be chased out.

• Brexit in 2017

That’s not really a 2015 prediction, is it? But, you know what, let’s make it a broader issue: I bet you there’s going to be a lot more pressure, from multiple sides, on the European unity. Which is good: Brussels is a power game gone horribly wrong over the backs of nice, sweet, decent ordinary people all across the ill-fated ‘union’.

And we’re not done yet. Steen Jakobsen also did an interview at CNBC, in which he has an 11th prediction, namely that the US might bail out its energy sector. I find that curious, because I’ve said a few times recently that I don’t think that’s going to happen. But first, Steen:

Steen Jakobsen: The US Could Bail Out Its Own Oil Sector (CNBC)

An economist who correctly predicted the fall in oil price this year has told CNBC that the U.S. government could look to bail out its energy sector in 2015 as the commodity’s low price starts hitting the country’s economy. “The U.S. energy sector is clearly important,” Steen Jakobsen, the chief economist at Danish investment bank Saxo Bank, told CNBC Wednesday. “They are paramount to the long-term strategic issue that the U.S. will be self-dependent on oil.”

[..]Jakobsen believes the [US energy] headwind could soon become a tailwind despite gas becoming cheaper at the pump for U.S. citizens. “It will subtract 0.5% from GDP, bare minimum,” he said. “There’s a precedent here, back in the 80s we also had an oil crisis and that led to bank recoveries.” He added that oil companies are in for a “massive correction,” similar to the downtrend seen in mining stocks, explaining that exploration was getting “hugely expensive” with energy majors having little free cash flow available. The S&P 500 index has clocked gains of around 11% so far this year but the energy sector within the benchmark is currently down nearly 12%.

One of Jakobsen’s “outrageous” predictions this time last year was for the commodity to drop below $80 per barrel which was achieved in November with oil now trading at around $65. BP sounded the alarm on Wednesday morning by saying that it is implementing a cost-cutting program due to the tumbling prices. Any potential bailout for the sector, or even the banks that lend to them, would prove vastly unpopular in the U.S.

Dennis Gartman, commodities investor and editor of The Gartman Letter, told CNBC that any bailout is simply inconceivable “We bailed the banks out and the public’s anger has been very real and very long standing,” [..] “Bailing out the oil companies would be even more seriously hated.”

BNP Paribas’ Global Head of Commodity Strategy, Harry Tchilinguirian, was equally in incredulous at the possibility of the U.S. government stepping in. “In the event that oil prices fall further into 2016 and hurt smaller un-hedged independent operators as their free cash flow declines and their ability to raise finance is curbed, it is possible to see closures or consolidation in the sector,” “But is this reason enough for the government to intervene?” Christian Schulz, the senior economist at Berenberg Bank, agreed that U.S. oil producers, and their lenders, could get into trouble if lower oil prices remain but said they are not “systemically important enough” to be bailed out by the government.

I don’t think public anger would be the major issue, and I also don’t think the industry is not “systemically important enough” (that seems a bit ignorant even for a ‘senior economist’, the entire edifice runs on oil).

I think the problem, the reason why America cannot bail out its oil industry, at least not overtly, lies elsewhere. Bailing out the US housing industry is one – expensive – thing. Bailing out Wall Street banks is another – closely related, and infinitely more expensive – , but still close. The latter involved bailing out foreign banks, but they’re still primary dealers, or in other words, part of the ‘family’.

Oil is a whole different piece of cake. The Fed or Treasury could try and lower exploration costs, or something in that vein, but in the end the only measure that would be really effective is raising revenue, and that can only be accomplished with higher prices. And since oil prices are set globally. that in turn means that bailing out US oil also means bailing out Russian, Libyan, Venezuelan oil. And that would be hard to defend in today’s American political climate, helping Putin and Maduro get back on their feet.

It’s of course a ‘curious conundrum’, to find that by helping your own you also help your ‘enemy’. But it is, from where I’m sitting, a very real issue when it comes to oil. On top of that, there’s of course the fact that the US shale oil industry is already falling to leveraged bits, and has never been a viable industry, just a land speculation Ponzi. And how or why could the US bail out that kind of scheme out, and at the same time, don’t let’s forget, save the whole financial world from the fall-out of what’s happening to oil? What to do when that plunge starts to infect stocks and bonds, which seems an inevitable next step?

I am of course ready to stand corrected, but I simply don’t see what Steen Jakobsen suggests. Oil is too shattered an industry within the US, and also, though in a different way, globally, to be bailed out and saved by the Fed’s bell.

Home Forums Can The US Bail Out Its Oil Industry?

Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
  • #17384

    Christopher Helin Fisk Service garage, San Francisco 1934 Interesting – if not outrageous – remarks today from Steen Jakobsen at Saxo Bank in Denmark,
    [See the full post at: Can The US Bail Out Its Oil Industry?]


    I had thought that the oil market could be managed somewhat via the paper market, ie. derivatives, as gold and stocks are to a large extent. Not saying it won’t be at some point but it seems the paper market is being left behind as a price setting mechanism with all the discounts now being offered. The Saudis and Iran and probably others are said to be offering oil at a 4 handle.

    While to you and me a managed market isn’t a market at all for those with power any other kind of market portends death of their power. Why and how the Saudis went down this path may become one of the major stories of the period.

    Admittedly it is very easy to get caught up in immediate short term things believing the portend huge trend changes when in fact looking back they are just squiggles. The overarching fact is that there are trillions of dollars, in bank deposit form anyway, that can put a bid under any asset, anyplace, anytime and many more trillions could be created by central banks.

    Golden Oxen

    There is an old saying that “The Stock Market Cannot Stand Uncertainty.”

    If that is true, “Look Out Below”

    The goings on in the Tower of Babel made more sense than the financial babble and rantings of the current scene.

    No one can even agree if oil going down is good or bad yet?????


    There could be a problem if the Oil crash starts to threaten systemic problems in bankland. It looks like prices could really crater, and stay there for an extended period. And with so much of the fed QE proceeds plowed into energy since ’08, things could turn into shit for TBTF very quickly. With the government in such a polarized disposition these days, I don’t see how they could do the same bailout, short of contriving a national security situation out of it. There are a lot of very bad possibilities out there that seem really close, but then again there always are. I will fall back on my favorite quote from the romans, ‘the more things change, the more they stay the same’.


    A variable oil import fee might be tolerable particularly if the proceeds were applied to the highway trust fund or some other application. As the US still imports several million barrels a day of foreign oil setting a $10 per barrel import fee would quickly mop up any surplus in the US ( assuming the oil can actually be moved which might be a problem for WTI) and put a floor under US oil prices that would still be low just not bargain basement.

    What we don’t want is the Tverberg situation where production is lost for good during a price slump only to see prices soar as global demand exceeds supply. As prices recover the oil tax import tax is reduced.

    John Day

    David Stockman presents the “shale bubble”, supported by the Fed “in plain sight” (and having a heart attack while choking on steak and Jack Daniels).

    This Time Is The Same: Like The Housing Bubble, The Fed Is Ignoring The Shale Bubble In Plain Sight


    Is another US bank bailout in the wind?

    Banks Win Big Time – Another Bailout is in the Wind.

    Possibly, according to Martin Armstrong.


    steve from virginia

    The idea that the US (government? Central bank? Musicians’ union?) can ‘bail out the US energy sector’ is absurd.

    It is like grabbing your shoes and pulling up. You cannot pull yourself off the ground no matter how hard you try.

    The establishment can shift funds from customers to drillers … or annihilate purchasing power altogether by making costly errors. It can add (or subtract) claims but the establishment cannot create some new form of fuel with which to bail. After all, the US energy sector’s product was just that: a new form of fuel, ‘unconventional’ crude.

    Keep in mind, central banks have been shifting funds from customers to drillers (and bankers) since 2009 and the result can be seen in the lower prices! Customers are broke! They can’t (won’t) get credit. This plunge has fingerprints of Bank of Japan all over it: the Japanese are 35% broker than they were before Abenomics due to the collapse in the price of the yen! Some bailout …

    The current oil price decline is structural in nature rather than a market defect. Market defects are price distortions. Customer insolvency has been caused by proportionately high energy prices since 2000: our consumption infrastructure is non-productive, fuel use is non-remunerative. High real prices are the outcome of increased scarcity: to make use of fuel we borrow as we cannot earn. Driving the car does not pay for it, what pays is debt. Exponential growth of loans has rendered insolvent those responsible for rolling these loans over — the customers.

    Look at it this way: what is being priced lower is not extraction efficiency but the worth of the consumption regime. This regime is non-productive, it always has been, it has always required a massive debt subsidy. Exeunt the subsidy and the expected price of crude in such a regime is zero (or negative). It is not hard to calculate how little oil will be extracted under the circumstances because all the easy-to-extract forms have already been pillaged.

    That the crisis has taken the form of lower crude prices has caught analysts by surprise but that is a defect on the part of the analysts not of the markets. There is nothing to ‘bail out’, only reality to deny.

    BTW: some government action is inevitable but it will likely take the form of either another invasion of another country (Venezuela?) or gasoline rationing. Neither one will work.

Viewing 8 posts - 1 through 8 (of 8 total)
  • You must be logged in to reply to this topic.