Dec 072014
 December 7, 2014  Posted by at 8:39 pm Finance Tagged with: , , , ,

John Vachon Big Four Cafe, Cairo, Illinois May 1940

The wider impact of plummeting oil prices is just now starting to be considered. Just about all ‘experts’ are way behind the curve. There’s still people insisting it’s all be a big boon to all of our economies. Not here, as you know if you follow, or as you can find out by retracing us over the past 1-2 months. I said from the get go that this cannot end well. Oil is too large a part of the economy to let a 40% price drop be reason to party.

And now both the Federal Reserve and the Bank for International Settlements have clued in, with urgency, to leveraged loans, their role in CDOs, AND their link to the energy industry. And whatever we may think of either institution, when both hoot the red alarm horn at the same time, we should pay attention.

Two articles from very different sources paint the – essentially same – picture. One is from Wolf Richter, easily one of my favorite writers at the moment in this narrow financial niche of ours, and his article today does a lot to confirm that. The other is from my ‘friend’ against all odds (we never met nor communicated), Ambrose Evans-Pritchard, who proves once more what makes him, despite all else, an interesting journalist to read.

What connects the two articles is leveraged loans, which in turn are strongly linked to collateralized debt obligations (CDOs). Ambrose quotes the BIS as saying 55% of CDOs are issued based on leveraged loans, an “unprecedented level”. Which is another way of saying we’re not in Kansas anymore. While Wolf confirms that leveraged loans play a major role in the oil (re:shale) industry.

Obviously, so do junk bonds, but those don’t bother the Fed and BIS as much; they get sold to investors, mutual funds, pension funds and the like. Leveraged loans on the other hand directly impact major banks. And that gives grandma Yellen the ‘Janet Jitters’ (let’s remember that term). For good reason: the Fed can’t buy oil, but its owner banks are hugely exposed to it.

This is what makes the falling oil prices so dangerous. As I must have said a million times in just the past few weeks, it’s not about the energy, it’s about the money. And this time around, I don’t have to do much writing, I laid plenty groundwork recently, and now the story tells itself. Apologies for the long quotes, I deleted what I thought was suitable. So first, here’s Wolf:

Oil, Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next

The price of oil has plunged nearly 40% since June to $65.63, and junk bonds in the US energy sector are getting hammered, after a phenomenal boom that peaked this year. Energy companies sold $50 billion in junk bonds through October, 14% of all junk bonds issued! But junk-rated energy companies trying to raise new money to service old debt or to fund costly fracking or off-shore drilling operations are suddenly hitting resistance.

And the erstwhile booming leveraged loans, the ugly sisters of junk bonds, are causing the Fed to have conniptions. Even Fed Chair Yellen singled them out because they involve banks and represent risks to the financial system. Regulators are investigating them and are trying to curtail them through “macroprudential” means, such as cracking down on banks, rather than through monetary means, such as raising rates. And what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.

This monthly chart by S&P Capital IQ’s shows the leveraged loan index for the oil and gas sector. Earlier this year, when optimism about the US shale revolution was still defying gravity, these loans were trading at over 100 cents on the dollar. In July, when oil began to swoon, these loans fell below 100 cents on the dollar. The trend accelerated during the fall. And in November, these loans dropped to around 92 cents on the dollar.

How bad is it? The number of leveraged loans in the oil and gas sector trading between 80 and 90 cents on the dollar (blue line in the chart below) has soared parabolically from 0% in September to 40% now. These loans are now between 10% and 20% in the hole! And some leveraged loans are now trading below 80 cents on the dollar:

“If oil can stabilize, the scope for contagion is limited,” Edward Marrinan, macro credit strategist at RBS Securities, told Bloomberg. “But if we see a further fall in prices, there will have to be a reaction in the broader market as problems will spill out and more segments of the high-yield space will feel the pain.”

Oil and gas stocks are bleeding: the Energy Select Sector ETF is down 21% from June; S&P International Energy Sector ETF down 29% and the Oil & Gas Equipment & Services ETF down 42% from early July. Smaller drillers are in trouble. All of them had horrific single-day plunges, some over 30%, on “Black Friday” after OPEC’s Thanksgiving decision [..] Traders who tried to catch these stocks have gotten their fingers sliced off since then:

Goodrich Petroleum -88% since June. Energy XXI -86% since June. Sanchez Energy -78% since June. Oasis Petroleum -75% since July. Etc.

These are the very companies that benefited during the crazy good times from yield-desperate investors who’d been driven to obvious insanity by the Fed’s interest rate repression. These investors – such as your bond mutual fund or your pension fund – loaded up on energy junk bonds and leveraged loans. And now the Fed-inspired financial house, where all risks have been eliminated by QE Infinity and ZIRP, is rediscovering risk. Turns out, the Fed, so ingeniously prolific in buying financial assets to inflate their prices, can’t buy oil.

Unless a miracle happens that will goose the price of oil pronto, there will be defaults, and they will reverberate beyond the oil patch. [..] even the 43 largest, most diversified players in the energy sector that are part of the S&P 500 are grappling with the new reality: analysts chopped earnings estimates by 20.5% since September 30, according to FactSet.

As of Friday, analysts expected the energy sector to report a 13.7% drop in revenues. At the beginning of the quarter, they’d expected a decline of only 1.7%, though oil prices had been plunging for three months. And they now expect a 14.6% swoon in earnings, as opposed to the 6.6% gain they still saw at the beginning of the quarter.

All of the energy companies in the S&P 500 got their EPS estimates decimated, even the biggest ones: Exxon Mobil by 20%, Chevron by 25%, Hess by 47%, Murphy Oil by 50%, and Marathon Oil by 63%.

And then Ambrose comes in from a completely different angle, to tell basically the exact same story. The overlords of finance are nervous and worried, and limited in the scope of their possible remedies. But I bet you, the Fed will still raise rates. With ‘official’ US jobless rates at 5.8%, they must, or they lose all credibility. And besides, don’t forget that Wall Street banks need higher rates now more than ever, never mind the real economy, exactly because of leveraged loans. Hey, amigo, everybody’s in oil!

Dollar Surge Endangers Global Debt Edifice, Warns BIS

Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world’s financial stability, the Bank for International Settlements has warned. The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at an annual rate of 47%. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars.

A chunk of China’s borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s [..]”To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns,” said the BIS in its quarterly report. “More than a quantum of fragility underlies the current elevated mood in financial markets,” it warned.

[..] Some of the violent moves lately go beyond stress seen in earlier crises, a sign that markets may be dangerously stretched and that many fund managers do not really believe their own Goldilocks narrative. “Mid-October’s extreme intraday price movements underscore how sensitive markets have become to even small surprises. On 15 October, the yield on 10-year US Treasury bonds fell almost 37 basis points, more than the drop on 15 September 2008 when Lehman Brothers filed for bankruptcy.”

The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said.

BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar.

The role of the US dollar is crucial in all this. If and when you see that “cross-border lending in dollars has tripled to $9 trillion in a decade“, you must recognize that you might as well forget about the demise of the greenback for the time being.

The dollar index (DXY) has surged 12% since late June to 89.36, smashing through its 30-year downtrend line. [..] Hyun Song Shin, the BIS’s head of research, said the world’s central banks still hold over 60% of their reserves in dollars. This ratio has changed remarkably little in 40 years, but the overall level has soared – from $1 trillion to $12 trillion just since 2000.

Cross-border lending in dollars has tripled to $9 trillion in a decade. Some $7 trillion of this is entirely outside the American regulatory sphere. “Neither a borrower nor a lender is a US resident. The role that the US dollar plays in debt contracts is very important. It is a global currency, and no other currency has this role,” he said.

The implication is that there is no lender-of-last resort standing behind trillions of off-shore dollar bank transactions. This increases the risks of a chain-reaction if it ever goes wrong. China’s central bank has ample dollar reserves to bail out its companies – should it wish to do so – but the jury is out on Brazil, Russia, and other countries. This flaw in the global system may be tested as the Fed prepares to raise interest rates for the first time in seven years. [..] The Fed’s new “optimal control” model suggests that rates may rise sooner and faster than markets expect. This has the makings of a global shock.

The great unknown is whether the current cycle of Fed tightening will lead to the same sort of stress seen in the Latin American debt crisis in the early 1980s or the East Asia/Russia crisis in the late 1990s. This time governments have far less dollar debt, but corporate dollar debt has replaced it, with mounting excesses in the non-bank bond markets. Emerging market bond issuance in dollars has jumped by $550bn since 2009. [..].. the weak links may not be where we think they are [..] the new threat may lie in non-leveraged investments by asset managers and pension funds funnelling vast sums of excess capital around the world, especially into emerging markets.

They engage in clustering and crowd behaviours, and are apt to pull-out en masse, risking a bad feedback-loop. This could prove to be today’s systemic danger. [..] [The BIS] now warns that the world is in many ways even more stretched today than it was in 2008 [..]

This is the story of today. Oil is everywhere. In all aspects of our lives. If oil prices suddenly move up a lot, people driving cars get hit, bad for the economy. If they move down much, the industry gets hit, jobs are lost, also bad for the economy. And everyone’s invested in that industry, whether they know it or not. We simply can’t afford $40 oil anymore than we can $200 oil; that is, in the short term. Our pensions funds, mutual funds and especially our banks are too heavily invested in it. Let alone our governments.

Falling oil prices are not just set to create future mayhem, they’re doing it now, you ain’t seen nothing yet. Much of the industry itself is scrambling to stay alive, many parties won’t make it if prices stay low or go lower, and the financial world, including your pension funds and mutual funds, will go south with it.

Home Forums More Than A Quantum Of Fragility

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    John Vachon Big Four Cafe, Cairo, Illinois May 1940 The wider impact of plummeting oil prices is just now starting to be considered. Just about all ‘e
    [See the full post at: More Than A Quantum Of Fragility]

    Ken Barrows

    In the long term, if there isn’t a price where marginal oil production can be profitable to the producer AND affordable to the consumer, our way of life is sunk, which is probably as it should be.

    Diogenes Shrugged

    And as has been pointed out by TAE many times before: when the oil industry lays off large numbers of highly educated, experienced personnel, it will be all but impossible to replace that talent when prices rise again. After all, a lot of those people are close enough to retirement to “go Galt,” while the younger ones find new professions. Crashing oil prices aren’t the only problem. They’re just the current problem in a what TAE regarded years ago to be a predictable sequence.


    Cairo Illinois looks about the same today and stands as a particular story of collapse on a small local scale in America. I drove through there only 2 months ago. Taking a detour to see what I knew was a sad thing. Collapse is the rule in much of rural America. In the Midwest and plains I am familiar with the only towns doing OK are ones that have some attachment, usually manufacturing, with major corporations. As I say Cairo was a particular story while in agricultural areas the cause was the relentless growth of the size of farming operations and population stagnation and then loss. Many towns simply no longer needed. Just places to put Walmart’s which wiped out the struggling local businesses.

    As to the Fed raising rates, Lee Adler maintains they can’t until they shrink their balance sheet but it seems all the relevant articles are behind the pay wall. The Fed has no magic wand to raise rates. Not Treasury rates anyway. Junk is another matter.

    My bizarro theory is that the trend and the goal is for the debt of giant global corporations to eventually carry lower rates than sovereign debt. Perhaps you can imagine what this would mean, or maybe not.


    Since you will not answer my question RIM, here is a synopsis for your readers.

    The total Debt in the world depending what all you count in it, is around 200-235 Trillion. This is the basic amount that is used for fear mongering. Comparing it to GDP it looks high. That would show a high Debt to Ebiitda ratio if the world were a corporation.
    But focusing on income ignores a very important side of the equation.
    Which side you ask? I am glad you asked Raul Numbskull Ilargi.
    The question is what is the value of the world Equity? I know this may be foreign concept to you so I will elaborate. The world total assets is the sum of the World Equity (not equity like stocks, but equity like residual value after Debt is paid off) + World Debt. So what is the value of world total assets?
    That is incredibly hard to figure out as values for a lot of things simply do not exist or are unknown.
    But we do know values of a lot of things. For example World Financial assets (stocks, bonds, money market funds, excluding all derivatives so keep your panties unbunched) is close to 300 Trillion, and total world Residential and Commercial Real estate is 250 Trillion or so. There are many, many, other assets which are owned by Governments which do produce revenue (for example roads and bridges which are toll taxed) that are not included in this count. Gold and other precious metals are also excluded. The value of all of those would conservatively be 150 Trillion and probably a lot higher. So total assets would be 700 Trillion. Subtracting out the Debt gives you between 465 and 500 Trillion as world Equity. For a Debt to equity ratio of around 0.4 to -.05. Now most single companies have rarely gotten into trouble until Debt to equity exceeds 4. So at 1/10th those levels only a retard like you could think that. That is why you and Nicole Foss have repeatedly missed the big picture and got everything wrong. And every now and then when after years of fear mongering something remotely goes your way you have orgasmic debt rattles.
    You think these numbers are made up?
    How about this? This is actually Statistics Canada’s graph.
    Showing Canada’s debt to Assets of 0.2! That would imply a Debt to Equity of 0.25! So fucking scary. That chart actually says that it is at the highest level in 35 years and it is still so incredibly low. I actually pointed this out to you in early 2009 as to the reason stocks would rise big time and you made fun of me. Sorry for being like you.
    And BTW the average Return on Assets by companies is around 6-8%. So 700 trillion producing a world GDP (income of 60-70 Trillion would make perfect sense).
    I am done with you although I am going periodically repost this so more people can see what a bunch of losers you both are.

    Ken Barrows

    My man. The value of an asset, of course, is dependent on the ability to acquire more debt somewhere in the system. And don’t everyone sell at once! I have no disagreement that the society you love continues as long as credit flows. And I suppose you think it will flow forever: there’s the disagreement.

    It is also true that the value of these assets, e.g. buildings, are dependent on a supply of relatively cheap oil, gas, and electricity. If that ends, values will change rapidly.


    “The value of an asset, of course, is dependent on the ability to acquire more debt somewhere in the system.” I have no clue how you reach that conclusion when I just showed you above that the world as a whole is hardly indebted.
    So no deflationary crash happening as Asset values far exceed debt. Sure there will be buying opportunities along the way as things get out of whack. We are getting one right now for Canadian oil and gas producers.
    ” It is also true that the value of these assets, e.g. buildings, are dependent on a supply of relatively cheap oil, gas, and electricity. If that ends, values will change rapidly.”
    No it will not. We have enough Lithium to produce an electric car for everyone on the planet, now whether we have enough to cure RIM’s mental state is a different question.


    I remember receiving some sage wisdom as a teen – I had in my possession a highly valued comic book that I was expecting to sell for at least close to the value it was listed for. The advice I received: “something is only worth what someone will give you for it”.

    I was dismissive of said advice when first hearing it, but when I went to sell at the comic book store the owner wouldn’t even offer me half its value.

    It was a good lesson to learn at a young age. Turns out people seem to enjoy overvaluing their assets, as it makes them feel more wealthy. They also seem to enjoy forgetting that they likely won’t get nearly the full value of said asset unless they unload it at the exact right time – when the asset is in high demand and there is ample liquidity to allow them to purchase it.

    Just thought I’d share.


    Diogenes Shrugged


    You’re counting the “values” of depreciating assets as being on a par with assets that produce income. You’re also implying that these “assets” are fungible, which they are not. Then there is the issue of who they belong to (the commons) and whether they legally qualify as collateral (they don’t). Furthermore, you’re implying that the world’s debts will be repaid, or at least serviced into perpetuity. Not a chance, pal.

    I’m not sure what you hope to accomplish with the personal attacks against Ilargi and Stoneleigh, as I’m unable to discern the root of your twisted-ness, but your accounting skills don’t impress. Michael Hudson – – “debts that can’t be repaid won’t be” – – is right. The bail-outs and coming bail-ins reflect bank credits of Earth-shattering magnitude that cannot be repaid, and eventually, will also not be serviceable by a population that is increasingly unemployed. Either you live in a fantasy world (due to ignorance, which might be forgivable), or as I said before, you’re being paid to post here as a troll. Unless Ilargi stole your girlfriend in high school and you still haven’t been able to adjust, I’m betting on the latter explanation.

    Of one thing I’m certain. You don’t adequately understand the majority of the information that’s been conveyed through this website.

    Diogenes Shrugged

    And by the way, Huck, I’ve been to the evaporation ponds at Silver Peak, NV, and was close friends with the geologist there. Your comment on lithium made me laugh out loud. Learn a little humility, man. You’re not half as bright as you pretend to be in the mirror.

    John Day

    What’s the historical value of water in California?
    It depends upon which historical epoch. A couple of fairly recent ones were basically too dry to support life and lasted a couple of hundred years each. (That’s what got the Anasazi, same droughts.)
    So there is more than just oil to focus on in the Double Jeopardy category of Black-Swan-Leavings.


    I know where I stand intellectually and I measure that by what I have accomplished and it is many magnitudes higher than RIM and Stoneleigh.
    There are about 30-40 papers on Lithium Supply and I have read most of them. The consensus by scientists is that there is adequate lithium for mid level penetration (20-40%) of electric vehicles with current technology. The price of lithium in a car battery is around $100-$200. So if Lithium rises 10 fold you will see Ocean lithium mining become feasible and possible way before that. I know this will be pooh-poohed by the dumbfucks here but hey none of them saw the 5 Million barrel of oil a day increase that came out of higher prices and were predicting calamity for a whole decade.


    “Then the old man got to cussing and cussed everything and everybody he could think of, and then cussed them all over again to make sure he hadn’t skipped any, and after that he polished off with a kind of a general cuss all round, including a considerable parcel of people which he didn’t know the names of, and so called them what’s-his-name when he got to them, and went right along with his cussing.”

    -Adventures of Huckleberry Finn, Chapter 6.


    Huck – “The lady doth protest too much, methinks.” Either a paid shill (and there are many out there) or someone who is trying desperately to convince himself more than others (been there).

    rapier – “The Fed has no magic wand to raise rates. Not Treasury rates anyway.” The Treasury is still issuing $70 billion a month in NET NEW SUPPLY and the Fed won’t be buying any of it.


    Huck – “The lady doth protest too much, methinks.” Either a paid shill (and there are many out there) or someone who is trying desperately to convince himself more than others (been there).
    a PAID SHILL to discredit a doomer website like this?
    There is too much of an IQ gap to continue this conversation. Good bye.

    Golden Oxen

    Huckleberry is indeed angry but he brings new insights to the table that are of value imho.

    Many thanks and praises to Ilargi for allowing radically different points of view along with some attitude issues.

    We constantly need Devil’s advocates to test our mettle and constantly re evaluate our views.

    Golden Oxen

    My problem with this oil article is the idea we have to get to 40 dollars for the real trouble.

    The charts presented in the article make it clear to me that the big trouble is already here.

    Prolonged 65 dollar oil is all it will take to blow this pile of leveraged paper away. Can the rest of the junk bond market escape is my new concern.

    Dr. Diablo

    Fascinating exchange. Solid hospitality to guests.

    It seems to me a lot of magical math going on here, which may be right or wrong but is nevertheless magical. It’s this very type of genius math that sank LTCM in an afternoon. Why? As Diogenes rightly points out, there is a liquidity problem. This has been the Achilles heel of derivatives models so long that it is no longer an accident but a conscious decision to wildly overvalue assets, and so pretend to be richer, therefore wielding more control over others. The problem that not even a fraction of people can sell in any market–and sell to whom?–is just one of the problems with this model. The idea of correctly valuing the earth, all its assets, all potential, and in addition, all its stocks, bonds, and promises, is positively ludicrous. Potty in the first regard. How would you do such a thing? Because a box of nails in one shop is sold at fair value? A company or two appear to be correctly priced in a few 1st world, “solvent” countries? What about Spain’s “fair value”? One day it was solvent, with a golden future of Euro-retirees and farms that sell profitably to Russia, the next day, neither has any value, the price drops 90%, and they’re all bought by Chinese firms? Presently Apple Computer is worth more than the entire Russian Bourse. So one company that makes phones for rich kids is worth more than every mine, mill, field, and weapons manufacturer in Russia? …Somehow, I don’t think so. So…therefore, where are your fair values? Efficient markets? Markets where you can measure, within an order of magnitude, what the paper is “worth”, and the assets behind the paper are “worth”? Don’t you know what things are “worth” depend overwhelming on the minds of men which change very rapidly?

    Were your thesis within 99% of being true, it would be utterly impossible for the U.S. market to be “worth” 400 in 1929, and 200 6 months later. Yet this happens almost continually in some market or other. LTCM said this wouldn’t happen for 6 sigma—roughly never happened since the Neanderthals roamed—yet in historic fact happens about every 10 years. You can’t know abstract value of things because there is none: the “value” of things is an IDEA that lives only in the minds and expectations of men. Those change instantly, as is proven almost every day. Being familiar with lithium, you should be familiar with the wild fluctuations in value in RE Metals, and particularly their companies, but even something as universal as oil easily moves from $120 to $40 in a few weeks. Math of “Value” doesn’t really account for this.

    Even IF you could account for value, a nation is not a corporation. It is an entirely different system with a different structure, different goals, responsibilities, different assets, different fields of motion. You could as well say an elephant and a lobster are both animals and give veterinary advice on them, but it would be ill-advised. Therefore, debt-ratios of a nation or a world are not in any way comparable to those of a company, household, or person. Nations have defaulted or been destroyed with low debts, and survived what seemed impossibly high debts. The reasons are expansive and complex, but certainly more than one ratio is involved.

    Whether TAE is right or wrong is hard to say. We are all right and wrong in all our arguments to some extent: but you haven’t made anything like a solid case here, and being polite and respectful is one way to be heard long enough to perhaps make one’s full case.

    Go on: but you’re going to need to do better than show a chart that says you can liquidate the entire inventory and manufacturing base of China or America, at full value, in a crisis where there are no buyers, to convince me that is fact.

    John Day

    It’s a bit late for Pearl Harbor Day news, but FDR took 8 steps, beginning a year before the event, to force Japan into war with the US, and was completely aware of the day, hour and nature of the impending Japanese attack, monitored radio communications of their fleet (not radio-silence), and got the aircraft carriers and other modern ships out of Pearl before the attack, specifically to get the US into the European war. The “McColum Memo” was the blueprint he followed. It’s declassified. This book is definitive, written by a WW-2 vet on a mission. The reviews of the book lay it out succinctly.

    I’m sure nothing like this is going on these days…

    V. Arnold

    @ John Day

    Well, well, good on you.
    We did to Japan exactly what we’re doing to Russia today. We sanctioned the hell out of them.
    12/07/41 is just another myth in the long line of myths from 1492 to the present.
    It’s pretty clear to any but fools, that the U.S. will fuck you up if you don’t tow the line.
    Putin, just speaking truth to power, shows the reams of lies propagated by the west for exactly what they are; the contrast is striking to say the least.
    i’m just thankful that in world full of adolescent leaders there is one adult (Putin) in the room. Otherwise we might be shooting and watching mushrooms in the skies.
    My bottom line is; governments are probably necessary, but NEVER to be trusted!
    Fuck’em all…



    Thank you for allowing Huckleberry to spew his senseless venom under the free speech principles everybody mouths, but hardly anybody practices. Dr Diablo responded perfectly.


    John Day – sounds like a good book. I went to the link you provided and one of the comments was:

    “I served with the US Army Special Security Group (USASSG) during the period 1984 to 1987 and worked on a “declassification review” of pre-World War Two and World War Two “Special Intelligence” documents. We safeguarded several thousand linear feet of files inside a vault at Arlington Hall Station, VA. There were hundreds of linear feet of Signals Intelligence (SIGINT) documents pertaining to Pearl Harbor. I admit that I was so dulled by the continuous adrenal rush of reading yet another document revealing some 50-year old historical snippet that I really did not attempt to think about the importance of what I read. After reading this book and comparing it to my memory I sat shocked at the accuracy of the author’s research.”

    As V. Arnold says, it’s exactly as it is with Russia today. If someone had have told me when I was young that I would think the way I do now, I wouldn’t have believed them.

    Hotrod – you’re right about Ilargi’s patience on this site. Karl Denninger flat out “ban hammers” people when they don’t agree with him, which is so wrong because many people have great arguments. When it comes to Russia and Japan, he just feels the U.S. is always right in what they do. It is good that huckleberry is free to express his opinion, but he just needs to drop the rudeness and arrogance. That is what people don’t like.

    Dr. Diablo, great arguments! So too with Ken, Diogenes and Variable.


    huckleberry – “So if Lithium rises 10 fold you will see Ocean lithium mining become feasible and possible way before that. I know this will be pooh-poohed by the dumbfucks here but hey none of them saw the 5 Million barrel of oil a day increase that came out of higher prices and were predicting calamity for a whole decade.”

    Ocean lithium mining! Great. No, no calamity in sight there! And all to what, increase your bottom line?

    Dr. Diablo

    I believe he means filtering lithium out of seawater, which is an ancient canard used to beat down the gold industry. Since it isn’t a matter of getting the element, but the PRICE at which it can be done, it’s going to remain like oil shale: “The energy of the future…and always will be.” (i.e. always 10 years away) There are a lot of variables, but basically if you’re not filtering seawater for even gold at $1900 (no project was proposed as viable in the entire runup, from $1400 to $1900, nor now) then very likely, filtering lithium at $4500/ton or $0.13/Troy ounce isn’t going to be a money-maker. A lot of technologies are like that, particularly green ones. Either the cost is not there, or the scale is not there.

    Doc Robinson

    Huckleberry said: “…Now most single companies have rarely gotten into trouble until Debt to equity exceeds 4… This is actually Statistics Canada’s graph…Showing Canada’s debt to Assets of 0.2! That would imply a Debt to Equity of 0.25! …so incredibly low.”

    Huckleberry, what happens to most single companies when their market dries up (regardless of their debt-to-equity ratios)?

    That graph with Statistics Canada data is actually from a report titled “Debt and family type in Canada”, and refers to “personal and unincorporated business assets per household.” Apples and oranges?

    The related section of this report:
    “As well as the day-to-day ability to pay for debts from income, another indicator of financial insecurity is the debt-to-asset ratio. This ratio tracks the degree to which debts are backed by assets. Higher ratios indicate there may be more Canadians who carry debt that is not secured by assets. Although household debt increased between 1990 and 2009, the value of personal and unincorporated business assets per household almost doubled over the same period. As a result, the debt-to-asset ratio remained relatively stable between 1970 and 2007, hovering around 16.7% (Chart 3). However, in 2008 and 2009 the debt-to-asset ratio increased to 19.6%, the highest level in more than 35 years.”

    Huckleberry, what happens to these debt-to-asset ratios when real estate values collapse? What’s the effect on the economy when corporate assets, like production facilities, are suddenly non-productive? In your opinion, what’s the range of debt-to-equity ratios in which companies will get into trouble (when real market values are considered), during prolonged periods of no growth?


    Dr. Diablo – thanks for the clarification re lithium mining. What you say makes sense.

    Doc Robinson – really good post!


    Hi Guys and Gals,
    I would like to point out that we must specifically define terms before discussing them.
    The word “growth” is an excellent example. What does it mean? In the last two comment sections I’ve observed people use it to mean entirely different things and this resulted in people talking past each and missing some of the insight available.
    The GDP number is represents “growth” in dollar terms, regardless of what that represents in society. This is a key way the oligarchs dupe the masses into thinking the economy is better than it really is.
    Let me provide an example. In the DRAM business, the quality of a given memory stick increases as does the production volume. Due to persistent over supply issues, the price IN DOLLARS often plummeted more than output increase. Was their growth in the real world? Absolutely – and a MASSIVE amount. What was the impact on GDP? It was much less because each unit of increased quality production fetched much less MONEY.
    The current situation is that PHYSICAL growth is negative (less physical stuff being built and sold) and MONETARY “growth” is increasing.
    Imagine a society that has $20 available money stock and $10 worth of sales in a year. The Central Bank wants to create monetary growth (it must be defined as there are different kinds of growth), so they issue $5 more debt into society. This causes main street money supply to temporarily increase (it eventually decreases when principle plus interest must be paid back) and prices to inflate, say, 10%. If physical production and physical sales remain CONSTANT, the dollar sales “growth” will be 10% as $22 is spent to buy the same number of goods that $20 bought the year before. The Central Bank then claims “10% growth” when there was NO PHYSICAL GROWTH IN THE ECONOMY.
    This is important because sustainable and valuable businesses and jobs are tied to physical growth, not temporary growth in criminal “think air” societal enslavement debt creation by fiat.


    Dio shrugged: “Crashing oil prices aren’t the only problem. They’re just the current problem in a what TAE regarded years ago to be a predictable sequence.”

    TAE has regarded many things as “predictable”. The factual record has not cooperated very well.

    DJIA, march 2009: 6,600
    DJIA, december 2014: circa 18,000

    The market has an agenda: to prove everyone wrong.

    Jef Jelten

    What Huck is most guilty of omitting as are most technocopians is the fact that the future they propose is one where everything is WAY more expensive, as if money is not an issue.

    This in the face of statistics showing that the vast majority of the populations of the world, some 90% or more are making less and losing wealth.

    Their immediate response to this inconvenient truth is that somehow this wondrous future with all of this theoretical or even nonexistent tech will provide more than enough jobs for everyone to be wealthy enough to continue to consume exponentially increasing price of the bare necessities.

    Please explain how this would work and no magic please.

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