Jan 132015
 January 13, 2015  Posted by at 10:01 pm Finance Tagged with: , , , , ,  11 Responses »

Unknown George Daniels Pontiac, Van Ness Avenue, San Francisco 1948

I was thinking about something along the lines of The Center Cannot Hold and Something’s Got To Give earlier, but then I thought there’s no way I haven’t used those titles before. And then it occurred to me that The Automatic Earth started 7 years ago this month. Just looked it up, it was January 22, 2008. Party next week!

Of course Nicole and I had been writing before that on the Oil Drum, who then didn’t want us to write about finance. They claimed we didn’t have the – academic, they were big on academic – credentials, as if that would ever stop me. Economists, the only people with the ‘proper’ credentials, are the last ones anyone should listen to, they engage in goal-seeked analysis only (no worries, Steve, you’re still no. 1 in our blogroll).

So we started The Automatic Earth, where we could write about what we wanted and thought needed to be addressed. In 2005 it may not have seemed important to the energy crowd, but they’ve all since seen that what we insisted on talking about back then was indeed a big event. 2007 brought Bear Stearns, and 2008 gave us Lehman. Not a minor trifle to write about in 2005. Plus, that means we’ve been doing this for 10 years already. No minor trifle either.

Meanwhile, peak oil has moved way back in the line of pressing events, the Oil Drum went so far south it’s out of sight and shale oil has just about everyone believing the peak oil theory was wrong all along. It wasn’t, not for conventional oil, which was all it addressed to begin with, but so things go. The financial casino trumped energy. But now those days seem over.

In January 2012, we were forced to move again, away from the Blogger platform, where the hacking and heckling and spamming had taken on absurd forms, from which Google refused to offer us protection. We made the mistake to move to Joomla, and it took a while to change – again – to WordPress, where we are now.

That last move cost us a lot of readers and – subscription – donors, something we’re still recuperating from today. It makes the work a lot harder, as Nicole’s long absences are testimony to. But that won’t end The Automatic Earth, and at the same time, that’s enough history. In the end, there’s nothing but forward. Best rock ‘n roll line ever, hands down: I Don’t Care About History, ‘Cause That’s Not Where I Wanna Be.

I was thinking today about Yeats’ The Center Cannot Hold when I saw European stock exchanges vs oil prices, and I wondered; are you sure about this, guys? France’s CAC40 and Germany’s DAX were up about 1.5% today, Greece even over 3%. While Europe’s Brent oil standard fell twice as fast as America’s West Texas Intermediate, diminishing the ‘normal’ $5 gap between the two to 50 cents or so. And stocks rise?

There is no way one can keep falling while the other rises. The Center Cannot Hold. I see stories about Texas homebuilders getting hit by the oil price drop, and it’s still very early innings. Sure, the price of oil will go up again at some point, but it’s the very reason it will that we should fear most, whatever it turns out to be.

It could be a war, proxy or not, it could be large scale lay-offs and defaults in the US shale patch, it could be severe civil unrest in one or more OPEC nations. None bode well for us, for the west, for its citizens. And if none of these things happen over the next year, oil prices won’t perform a Lazarus act. Or a phoenix.

That shouldn’t be all that much of a surprise. We’ve been living in cloud cuckoo land ever since the financial crisis we said back in 2005 would come, materialized. We live in a world of spin and propaganda and embellished numbers , and we’ve come to see them as a new normal. It’s the 55% drop of price of oil that is the first sign that central banks don’t control the universe, or the world, or even our own lives.

But, judging by those European exchanges, we’re still not listening, or keeping an eye out. We see signals, but we don’t recognize them, we don’t know what they mean. Like this little tidbit from CNBC:

Here’s Why Oil Is Such A Problem For Corporate Earnings

On December 1st, analysts anticipated that Energy earnings for Q1 2015 would decline 13.8% compared to Q1 2014, according to S&P Capital IQ. As of Monday, analysts expected Energy earnings for Q1 2015 to decline 41.0%. Think about that: in 5 weeks, earnings expectations for the entire Energy group have gone from down 13.8% to down 41.0%.

Q1 earnings for the Energy sector were cut by $7.7 billion from December 1 through today. The S&P 500 as a whole saw a cut of $9.1 billion during the same period. So Energy is $7.7 billion/$9.1 billion = 84% of the decline in the dollar value of the earnings decline we have seen in the past five weeks. See why the market is so focused on oil for the moment?

Methinks the market is not focused nearly enough on oil. Yet. Though numbers like that should be cause for pause. Especially combined with the knowledge that most other numbers, GDP, jobs, you name them, are nothing but shrewd spin jobs. And, lest we forget, that the Fed no longer supplies free lunch. That the Fed has a plan. A plan that will benefit its owner/member banks, not you and me.

In all likelihood, the oil mayhem will start blowing up in proxy territory, perhaps Turkmenistan, perceived as a possible wound to Putin, perhaps Bahrain, where the Saudis have been interfering militarily for quite some time.

Thing is, that whole line about how lower oil prices were going to be a boost for our economies was ignorant from the start. And there’s still plenty people believing just that. That may explain those EU stock exchange gains. That sort of thing all comes from people who don’t understand to what extent oil is pivotal to our societies.

That we would be lost without it. And that dropping its price by 55% and counting will make the machine run a lot less efficiently. Think of what you pay for oil and gas as the grease that keeps the machine running. Not the product itself, but what you pay for it. We just took away a lot of grease. And you know what that does to a machine. When oil drops, so do many people’s wages, and jobs. And then businesses start to close. And we enter deflation. And more businesses close. And more jobs are lost, and more wages squeezed. Ergo: more deflation.

It’s not yet too late, but ask yourself: can the machine run for, like, another year with this diminished amount of grease? Or with even less, what if oil falls to $40, or even $30? Bad for Texas, devastating for Alaska and North Dakota, and terrible for many Middle Eastern nations that have so far been our friends and allies (even if they don’t exactly espouse the ‘values’ we so proudly proclaimed at the #JeSuisCharlie promo events). What if they turn on us? The way ISIS did?

But that’s not our biggest, or most immediate, concern. We’re not in 2008 anymore, when an oil price drop actually helped us crawl out of a tight spot. We’re $50 trillion down the road, and there won’t be another $50 trillion, or another road. For all intents and purposes, we are the center today, and we cannot hold this way.