Dec 242014
 December 24, 2014  Posted by at 1:13 am Finance Tagged with: , , , ,

NPC Sidney Lust’s 18th Street cinema decorated for Halloween, Washington, DC Oct 1920

There are many things I don’t understand these days, and some are undoubtedly due to the limits of my brain power. But at the same time some are not. I’m the kind of person who can no longer believe that anyone would get excited over a 5% American GDP growth number. Not even with any other details thrown in, just simply a print like that. It’s so completely out of left field and out of proportion that you would think by now at least a few more people understand what’s really going on.

And Tyler Durden breaks it down well enough in Here Is The Reason For The “Surge” In Q3 GDP (delayed health-care spending stats make up for 2/3 of the 5%), but still. I would have hoped that more Americans had clued in to the nonsense that has been behind such numbers for many years now. The US has been buying whatever growth politicians can squeeze out of the data and their manipulation, for many years. The entire world has.

The 5% stat is portrayed as being due to increased consumer spending. But most of that is health-care related. And economies don’t grow because people increase spending on not being sick and/or miserable. That’s just an accounting trick. The economy doesn’t get better if we all drive our cars into a tree, even if GDP numbers would say otherwise.

All the MSM headlines about consumer confidence and comfort and all that, it doesn’t square with the 43 million US citizens condemned to living on food stamps. I remember Halloween spending (I know, that’s Q4) was down an atrocious -11%, but the Q3 GDP print was +5%? Why would anyone volunteer to believe that? Do they all feel so bad any sliver of ‘good news’ helps? Are we really that desperate?

We already saw the other day that Texas is ramming its way right into a recession, and North Dakota is not far behind (training to be a driller is not great career choice going forward), and T. Boone Pickens of all people confirmed today at CNBC what we already knew: the number of oil rigs in the US is about to do a Wile E. cliff act. And oil prices fall because global demand is down, as much as because supply is up. A crucial point that few seem to grasp; the Saudis do though. Good for US GDP, you say?

What I see more than anything in the 5% print is a set-up for a Fed rate hike, through a variation on the completion backward principle, i.e. have the message fit the purpose, set up a narrative that makes it make total sense for Yellen to hike that rate. And Wall Street banks (that’s not just the American ones) will be ready to reap the rewards of the ensuing chaos.

And I also don’t understand why nobody seems to understand what Saudi Arabia and OPEC have consistently been saying for ever now. They’re not going to cut their oil production. Not going to happen. The Saudis, probably more than anyone, are the guys who know what demand is really like out there (they see it and track it on a daily basis), and that’s why they’ll let oil drop as far as it will go. There’s no other way out anymore, no use calling a bottom anywhere.

In the two largest markets, US demand is down through far less miles driven for a number of years now, while domestic supply is way up; at the same time, real Chinese demand is way below what anybody projects, and oil is just one of many industries that have set their – corporate – strategies to fit expected China growth numbers that never materialized. Just you watch what other – industrial – commodities fields are going to do and show in 2015. Or simply look at prices for iron ore, copper etc. today.

OPEC Leader Vows Not To Cut Oil Output Even If Price Hits $20

In an unusually frank interview, Ali al-Naimi, the Saudi oil minister, tore up OPEC’s traditional strategy of keeping prices high by limiting oil output and replaced it with a new policy of defending the cartel’s market share at all costs. “It is not in the interest of OPEC producers to cut their production, whatever the price is,” he told the Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.” He said the world may never see $100 a barrel oil again.

The comments, from a man who is often described as the most influential figure in the energy industry, marked the first time that Mr Naimi has explained the strategy shift in detail. They represent a “fundamental change” in OPEC policy that is more far-reaching than any seen since the 1970s, said Jamie Webster, oil analyst at IHS Energy. “We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” he said. “Just about everything will be touched by this.”

Saudi Arabia is desperate alright, but not nearly as much as most other producers: they have seen this coming, they’ve been tracking it hour by hour, and then made their move. And they have some room to move yet. Many other producers don’t. Not inside OPEC, and certainly not outside of it. Russia should be relatively okay, they’re smart enough to see these things coming too, and adapt accordingly. Many other nations don’t and haven’t, perhaps simply because they have no room left. Anatole Kaletsky makes quite a bit of sense at Reuters:

The Reason Oil Could Drop As Low As $20 Per Barrel

… the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004.

Whichever outcome finally puts a floor under prices, we can be confident that the process will take a long time to unfold. It is inconceivable that just a few months of falling prices will be enough time for the Saudis to either break the Iranian-Russian axis or reverse the growth of shale oil production in the United States. It is equally inconceivable that the oil market could quickly transition from OPEC domination to a normal competitive one.

The many bullish oil investors who still expect prices to rebound quickly to their pre-slump trading range are likely to be disappointed. The best that oil bulls can hope for is that a new, and substantially lower, trading range may be established as the multi-year battles over Middle East dominance and oil-market share play out. The key question is whether the present price of around $55 will prove closer to the floor or the ceiling of this new range. [..]

… the demarcation line between the monopolistic and competitive regimes at a little below $50 a barrel seems a reasonable estimate of where one boundary of the new long-term trading range might end up. But will $50 be a floor or a ceiling for the oil price in the years ahead?

There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. [..]

The U.S. shale revolution is perhaps the strongest argument for a return to competitive pricing instead of the OPEC-dominated monopoly regimes of 1974-85 and 2005-14. Although shale oil is relatively costly, production can be turned on and off much more easily – and cheaply – than from conventional oilfields. This means that shale prospectors should now be the “swing producers” in global oil markets instead of the Saudis.

In a truly competitive market, the Saudis and other low-cost producers would always be pumping at maximum output, while shale shuts off when demand is weak and ramps up when demand is strong. This competitive logic suggests that marginal costs of U.S. shale oil, generally estimated at $40 to $50, should in the future be a ceiling for global oil prices, not a floor.

As Kaletsky also suggests, there is the option of a return to an OPEC monopoly and much higher prices, but I personally don’t see that. It would need to mean a return to prolific global economic growth numbers, and I simply can’t see where that would come from.

Meanwhile, there’s the issue of ‘anti-Putin’ sanctions hurting western companies, with an asset swap between Gazprom and German chemical giant BASF that went south, and a failed deal between Morgan Stanley and Rosneft as just two examples, and that leads me to think pressure to lift or ease these sanctions will rise considerably in 2015. Why Angela Merkel is so set on punishing her (former?) friend Putin, I don’t know, but I can’t see how she can ignore domestic corporate pressure to wind down much longer. Russia is part of the global economic system, and excluding it – on flimsy charges to boot – is damaging for Germany and the rest of Europe.

Finally, still on the topic of oil and gas, Wolf Richter provides another excellent analysis and breakdown of US shale.

First Oil, Now US Natural Gas Plunges off the Chart

It’s showing up everywhere. Take Samson Resources. As is typical in that space, there is a Wall Street angle to it. One of the largest closely-held exploration and production companies, Samson was acquired for $7.2 billion in 2011 by private-equity firms KKR, Itochu Corp., Crestview Partners, and NGP Energy Capital Management. They ponied up $4.1 billion. For the rest of the acquisition costs, they loaded up the company with $3.6 billion in new debt. In addition to the interest expense on this debt, Samson is paying “management fees” to these PE firms, starting at $20 million per year and increasing by 5% every year.

KKR is famous for leading the largest LBO in history in 2007 at the cusp of the Financial Crisis. The buyout of a Texas utility, now called Energy Future Holdings Corp., was a bet that NG prices would rise forevermore, thus giving the coal-focused utility a leg up. But NG prices soon collapsed. And in April 2014, the company filed for bankruptcy. Now KKR is stuck with Samson. Being focused on NG, the company is another bet that NG prices would rise forevermore. But in 2011, they went on to collapse further. In 2014 through September, the company lost $471 million, the Wall Street Journal reported, bringing the total loss since acquisition to over $3 billion. This is what happens when the cost of production exceeds the price of NG for years.

Samson has used up almost all of its available credit. In order to stay afloat a while longer, it is selling off a good part of its oil-and-gas fields in Oklahoma, North Dakota, Wyoming, and Colorado. It’s shedding workers. Production will decline with the asset sales – the reverse of what investors in its bonds had been promised. Samson’s junk bonds have been eviscerated. In early August, the $2.25 billion of 9.75% bonds due in 2020 still traded at 103.5 cents on the dollar. By December 1, they were down to 56 cents on the dollar. Now they trade for 43.5 cents on the dollar. They’d plunged 58% in four months.

The collapse of oil and gas prices hasn’t rubbed off on the enthusiasm that PE firms portray in order to attract new money from pension funds and the like. “We see this as a real opportunity,” explained KKR co-founder Henry Kravis at a conference in November. KKR, Apollo Global Management, Carlyle, Warburg Pincus, Blackstone and many other PE firms traipsed all over the oil patch, buying or investing in E&P companies, stripping out whatever equity was in them, and loading them up with piles of what was not long ago very cheap junk bonds and even more toxic leveraged loans.This is how Wall Street fired up the fracking boom.

PE firms gathered over $100 billion in their energy funds since 2011. The nine publicly traded E&P companies that represent the largest holdings have cost PE firms at least $12.7 billion, the Wall Street Journal figured. This doesn’t include their losses on the smaller holdings. Nor does it include losses from companies like Samson that are not publicly traded. And it doesn’t include losses pocketed by bondholders and leveraged loan holders or all the millions of stockholders out there.

Undeterred, Blackstone is raising its second energy-focused fund; it has a $4.5 billion target, Bloomberg reported. The plunge in oil and gas prices “has not created a lot of difficulties for us,” CEO Schwarzman explained at a conference on December 10. KKR’s Kravis said at the same conference that he welcomed the collapse as an opportunity. Carlyle co-CEO Rubenstein expected the next 5 to 10 years to be “one of the greatest times” to invest in the oil patch.

The problem? “If you have an asset you already own, it’s probably going to go down in value,” Rubenstein admitted. But if you’ve got money to invest, in Carlyle’s case about $7 billion, “it’s a great time to buy.” They all agree: opportunities will be bountiful for those folks who refused to believe the hype about fracking over the past few years and who haven’t sunk their money into energy companies. Or those who got out in time.

We live in a new world, and the Saudis are either the only or the first ones to understand that. Because they are so early to notice, and adapt, I would expect them to come out relatively well. But I would fear for many of the others. And that includes a real fear of pretty extreme reactions, and violence, in quite a few oil-producing nations that have kept a lid on their potential domestic unrest to date. It would also include a lot of ugliness in the US shale patch, with a great loss of jobs (something it will have in common with North Sea oil, among others), but perhaps even more with profound mayhem for many investors in US energy. And then we’re right back to your pension plans.

Home Forums You Thought The Saudis Were Kidding?

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    NPC Sidney Lust’s 18th Street cinema decorated for Halloween, Washington, DC Oct 1920 There are many things I don’t understand these days, and some ar
    [See the full post at: You Thought The Saudis Were Kidding?]


    5% GDP. Is that deflationary? Will it be when it hits 7 to 9% in a few quarters? The level the Fed needs it to be,to fund the U.S. Union and Government Pension Systems?


    A whole lotta folks left a whole lotta money on the table, in believing fiat monetary systems are deflationary in nature.

    Golden Oxen

    My gut feeling is the Saudi’s have very little to do with all this.

    We are witnessing a world wide economic contraction that is accelerating in my opinion and all the jibber jabber and phoney numbers are mere noise that confuse the issue.

    The damage that has been done to the minds of the worlds middle class by all this talk of buy ins, pension cuts, negative interest rates etc as well as fears of job stability are never talked about but have taken a major toll on confidence.

    Expecting big trouble after the holidays.


    Agree with GO, except I expect ‘big trouble’ after the last LTO fields drilled in the sweet spots start to decline in earnest.


    You are correct. Because they listen to bullshit spewed by RIM. When we have never had deflation of any magnitude in a fiat system.
    Because when World assets are over 1.4 Quadrillion and world Debt is 230 Trillion only a retard like RIM would say deflation is inevitable.
    Like his stupid sidekick’s Canadian Real estate will go down 90% call in 2010. How’s that working for you Nicole?


    From the get go, I thought this was all due to global slowdown but American distraction has turned it into an energy issue. Assuming there is some new level at which things will stabilize and an ever increasing global population, it’s only a matter of time until energy limits are slammed into again.

    People absolutely hate insecurity and avoid it at all costs. Consequently, we have a future of optimistic predictions, crazy solutions, deep pessimism, massive denial and all the other things people do as they scramble to feel “secure”. Will be one helluva ride.


    Supply and demand started the ball rolling down in oil but now it has taken on a life of its own, supported by Saudi rhetoric and others too. That’s how markets work even our corrupted ones.

    My new take is the Saudis don’t like anyone especially Iran and Russia and talking down oil is the best way to hurt them. They have their issues with the West too so shaking them up a bit is fine. It is also all simply a way to exercise power. No matter the outcomes the feeling of power is always seductive. With the king all but dead it is hard to say where the decision making lies there. I don’t think anyone knows what machinations are going on at the top of the family which is the state. Let’s not forget the House of Saud is hugely motivated by its particular sect of Islamic fundamentalism where there is a longing to return to the 11th century. I suppose they know our feckless leaders would never consider the most obvious thing that real empire builders would. Simply taking over the oil fields. Of course I now remember that there are dark rumors that the infrastructure has some self destruct systems in place. It is now totally forgotten that Nixon at least entertained the thought.

    And again, the Fed cannot raise longer term Treasury rates. Most other rates can rise and many are right now but unless Uncle Sam either goes on another borrowing binge or starts talking about default or the Fed itself starts selling paper there is no short term way to raise Treasury rates in a world filled with trillions of dollars looking for a safe home. Which rates are rising is a crucial distinction.

    The safe haven status of the US Treasury and equity markets and the dollar speaks not to decline but to a new period of ascendancy, relative anyway. In certain ways including the embrace of The Empire of Chaos all over the globe can be seen and certainly is by the power elites here as the empire gaining strength.


    The Saudis might not like Russia and Iran, much the same way as maybe we don’t like some of our relatives when we see them at Xmas. If the U.S. did not like what the Saudis were doing, they’d simply take them out, Gaddafi-style. There’s an agreement between the Saudis and the U.S. – the Saudis buy U.S. Treasuries and do what they’re told, and, in turn, the U.S. protects the Saudis.

    Look at how quickly Gaddafi was gone when he didn’t play ball.

    NATO’s Destruction of Libya

    This has the “U.S.” written all over it, just like the 5% GDP fairytale, sanctions haven’t worked in Cuba, so now we’re accepting them back fairytale, North Korea just hacked and Ukraine rebels downed the plane fairytale.

    There is a whole other layer of players above sovereign countries who are coming up with the narrative/story and who, as Ilargi says, “…have the message fit the purpose, set up a narrative that makes it make total sense”.

    There’s something happening here, but what it is ain’t exactly clear. Who is going to benefit?


    “So, we agree, American shale-oil production must die. As a token of our understanding, we give you this bling made of solid barbaric relic.”



    Depending on how much you deposit in a Chinese bank, you just might end up with a free Mercedes-Benz or a bag of potatoes.

    “Lenders in China, desperate to attract customers who are finding alternatives for their savings, are turning to giveaways. On offer at one branch in Beijing: An iPhone 6 Plus or a Mercedes-Benz.

    Cash rebates, trips abroad, interest rates at the highest premium ever over the official benchmark rate, even free vegetables are among other goodies banks are dangling to get Chinese savers to deposit their yuan in savings accounts.”


    ” It would also include a lot of ugliness in the US shale patch, with a great loss of jobs.. ”

    You’ve got a major point there. Oil booms always provide an outlet for young ambitious dudes with physical skills. This oil boom is different because there are NO OTHER OUTLETS for such men. Previously they could go back home and find decent physical jobs. Those back-home jobs didn’t pay as much as oil work, but they were a lot more comfortable. Now they’ll go home to long-term unemployment. Not a good sign for law and order.

    Dr. Diablo

    I see a lot of straight-line extrapolation around. First oil was going to $200 because the line said “up.” Now it’s going to $20 because the line says “down,” yet neither predicted the reversals at all. Simple math: if oil projects aren’t profitable at $60, then over time oil will rise back to $60, or $80, or whatever the breakeven line is, regardless of the economy. Because as the man says, what other means can you move 4 men and their luggage 10 miles at 50mph for .25 litres of gas?

    In the meantime, however, prices will wildly undershoot (and already have), shutting off production–many times permanently, by stranding small, less profitable tail-ends of the fields–then once the fields have been ruined more than they had to be due to the financial, “bubble” mismanagement, the production wall will suddenly strike and raise prices far OVER what they need to be. …That’s what happens when you have a broken price mechanism, either in central planning, fraud, or bubble finance, none of which are capitalism. So I don’t doubt we’ll get back up there in price soon enough. And in a stable structure, probably the price ceiling would be getting progressively lower due to a fraying economy and poor wages. However, I expect the system will fracture and be re-written this time, and not take the straight-line projection, just as it didn’t the last two or more times.

    Economy? 5% GDP??? I nearly banged my head on the steering wheel hearing these feckless idiots on NPR. Wtf do they live? K street? Reality check: 20% of Millennials live in poverty. More than that in Britain and Europe where 20% of ALL people live in poverty. Near 50% of 25-year-olds live at home. And these guys have the gall to say unemployment is super-low, the economy hasn’t been this hot in over 10 years? Friends, we have reached a “reality-free zone.” They may not have thought it would be this bad, but clearly the facts are being synthesized from thin air to support the pre-determined narrative: that is, to raise rates. Any excuse will do, they no longer care about reality.

    But funny thing: even when you no longer care about or include gravity in your calculations, it still exists.

    Russia can tolerate low prices. China can tolerate low input costs. Europe can stand a lower cost of living. But there’s one nation that can’t tolerate low oil prices, a multi-trillion industry to be cut in half, the dollar to spiral up, and deflation to take hold, and that’s the United States. It looks like it can with the dollar rising, but it can’t–that is exactly the Depression-era scenario where gold (i.e. money) was scared out of the whole world and fled to the U.S. for safety, killing the economy and markets alike. Ultimately, Roosevelt had to default, revalue gold, and re-set the Monopoly board as the bad economy destroyed the REAL financial market, i.e. bonds. Cities defaulted, states defaulted, and without wages or economic motion, companies REALLY defaulted, taking the banks with them. The Dow was merely a sideshow. So Huck Finn, deflation in a fiat system—this one’s for you.

    It may look like the U.S. is raiding the emerging world by raising the dollar–and they are for now–but this is a temporary distance in a predetermined destination. Like Roosevelt, the dollar will be defaulted on via a rules change or the pain will never end. One other thing: by leaving the dollar standard–just as the nations left the gold standard in 1930–the now 100+ BRICS nations will recover first. Addendum to that, when the U.S. dollar is no longer the reserve currency, the U.S. will be valued on its trade and industry. And the U.S. has become a hollow shell of graft, fraud, waste, and mis-reporting, with 20% of GDP probably Wall St. paper ginning, and 20% more in health care waste, with the real nation perhaps no larger than Brazil or Russia.

    That’s a long way down, friends.


    Merry Christmas everybody, and all those around you!

    John Day

    T.Boone Pickins says that Peak Oil WAS in 2005, and that the drop in oil prices is due to loss of global demand, as CNBC dittohead interviewer (younger, stronger) shouts him down, until Pickins tells him who the “expert” is.

    Also: An airport-worker witness in the MH-17 shoot down says a Ukrainian fighter jet did it, leaving with air to air missiles, returning without them, names the pilot and quotes him.


    Ilargi, both the WSJ and Zero Hedge badly botched the reporting on the 3rd quarter GDP revisions, and then Yves quoted what you wrote here and spread the damage…

    real health care outlays were a tenth of 3rd quarter GDP and less than half of the upward revision….they actually increased at a real rate of 4.6%, so health care was actually a small drag on the overall quarterly increase…

    here’s my breakdown of PCE, with the links showing my math:

    <p>real personal consumption expenditures, the largest component of GDP, were revised to show growth at a 3.2% annual rate rather than the 2.2% growth rate reported last month, and hence they contributed 2.21% to the quarter’s growth rate, not the 1.51% previously estimated…real consumption of durable goods grew at a 9.2% rate, revised from the 8.7% growth rate reported in the second estimate, and added .67% to the final GDP figure; major contributors to that were a 15.7% real growth rate in consumption of recreational goods and vehicles and a 11.2% real growth rate in motor vehicle and parts consumption, while real consumption of furnishings and durable household equipment rose slightly and consumption of other durable goods fell, even as all durables consumption benefited from a negative 2.1% deflator…meanwhile, real personal consumption of non-durable goods rose at a 2.5% rate and added 0.39% to GDP, revised from the previous estimate of a 2.2% growth rate, even though inflation adjusted outlays for food and beverages, clothing, and energy goods were virtually unchanged….in addition, real consumption of services grew at an 2.5% rate and added 1.15% to the quarter’s growth, revised from the 1.2% growth rate and 0.53% addition reported in the second estimate last month, as real consumption of financial services and insurance grew at a 7.0% annual rate, real consumption of food and lodging services grew at a 4.9% rate, and real outlays for health care services rose at a 4.6% rate, offsetting a small decrease in real outlays for housing and utilities and while outlays for recreation and other services were flat.. </p>

    Mike Twain

    ‘We owe, we owe, so we got to sell the oil, ya know’ Does everybody think the Saudis are debt free? They can sell oil down to zero if they want, but they still got to cover the monthlies, just like the shalers. Raul and Nicole got it right, but nobody can call the exact moment of the turn. Not even the great and powerful Marty Armstrong. I’m still going with early rather than one day late.
    By the way, in Bosnia the government was still proclaiming good times just 72 hours before the SHTF. Read a little Selco before you take your next happy pill.


    As for the growth in the economy, you have the reality exactly. It always reminds me of a very old joke about lies, damn lies, and government statistics. Or the one about the applicants for an accounting job, where a lawyer gets the position after asking the CEO, ‘what do you want the answer to be?’.

    1999 was the end of growth. We have seen nothing but national contraction since then,the reign of seasonal adjustments. A generation living in their parent’s basement, 15 years of deflation in incomes and occupations, national policy in the hands of bank sycophants, consumer sentiment at all time highs, you just can’t make stuff like this up. Oh, and I almost forgot about the national denial of an almost certain ecological catastrophe.

    And KKR and the Carlyle Group think it’s a great time to buy….

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