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They say history repeats itself, and given the cyclical nature of the oil and gas business, many look to the past when trying to guess what is coming next, but past experience doesn’t always offer an exact model for the present.

Much has changed between the 2008 oil and gas downcycle and the one the industry is currently working through today. The drop in oil prices that started in 2008 took place against the backdrop of the Global Financial Crisis, aka The Great Recession. Economies all around the world sputtered to a halt, and demand for oil dropped. Lehman Brothers filed for bankruptcy protection on September 15, 2008. It was the all-time largest bankruptcy filing.

Oil prices dropped from historic highs of $144.29 in July 2008, to $33.87 five months later. OPEC, the world’s traditional “swing crude oil producer,” took its traditional actions, cutting production by 16 percent in eight months to bring stability to global prices, which was led primarily by the group’s largest producer, Saudi Arabia. Crude oil consumption and production dropped by 1.5 percent and 1.2 percent, respectively, before coming back to parity from 2008 to 2010. U.S. producers pulled back on drilling operations until prices began to improve, switching from conventional drilling to horizontal drilling following the 2008 crash. And except for the banks and car companies, there wasn’t much going on at the bankruptcy court house by the E&P or OilService (OFS) companies.

In aggregate, debt-to-EBITDA for the E&P companies was approximately 1.6x, and the average capital efficiency (EBITDA per BOE divided by finding and development costs per BOE) was 230 percent, while for the OFS sector debt-to-EBITDA was 0.9x, while capital intensity (capital expenditures divided by EBITDA) was 62 percent. The companies, in general, had the cash and balance sheet to work through another downward descent in the 7th commodity cycle since 1981.

…click on the above link to read the rest of the article…

The Cure is Worse than the Disease

May 7, 2016

The Cure is Worse than the Disease

A Week to Remember

Today we look back to the recent past with singleness of purpose. Context and edification for the present economy is what we’re after. We have questions…

How come the recovery has been so weak? Why is it that, nearly seven years after the official end of the Great Recession, the economy’s still mired in a soft muddy quagmire? Squinting, focusing, and refocusing, there’s one particular week that rises above all others.

Hank the scaremonger – in meetings behind closed doors, he threatened Congressmen with financial apocalypse and even martial law if they didn’t hand over $700 billion in tax payer money with essentially no oversight. This has been independently confirmed by several Congressmen. Griffin’s “The Creature from Jekyll Island” is often decried as “conspiracy theory” by establishment shills, but it inter alia contains an eerie prediction of practically everything that eventually happened in 2008.Photo credit: Talks at Google

On Saturday September 20, 2008, Treasury Secretary Hank Paulson delivered a draft of the Troubled Asset Relief Program (TARP) to Congress for review. If you recall, it had been another wild week. On Monday, September 15, after 158 years of operation, Lehman Brothers vanished from the face of the earth…Dick Fuld, “The Gorilla,” be damned.

All week the sky relentlessly fell on financial markets. Even money market funds were in full panic. In fact, a record $169.03 billion of capital had vacated money market funds in the week ended September 17.

That same day, the Wall Street Journal’s headline was, “U.S. to Take Over AIG in $85 Billion Bailout.” On top of that, the Primary Fund broke the buck – falling to $0.97 cents a share. The SEC also went so far as to impose a 10 trading-day ban on short sales of 799 financial stocks.

…click on the above link to read the rest of the article…

Quantitative to Qualitative–Is Unelected Nationalisation Next?

April 11, 2016

QUANTITATIVE TO QUALITATIVE – IS UNELECTED NATIONALISATION NEXT?

Last year, in a paper entitled The Stock Market Crash Really Did Cause the Great Recession – Roger Farmer of UCLA argued that the collapse in the stock market was the cause of the Great Recession:-

In November of 2008 the Federal Reserve more than doubled the monetary base from eight hundred billion dollars in October to more than two trillion dollars in December: And over the course of 2009 the Fed purchased eight hundred billion dollars worth of mortgage backed securities. According to the animal spirits explanation of the recession (Farmer, 2010a, 2012a,b, 2013a), these Federal Reserve interventions in the asset markets were a significant factor in engineering the stock market recovery.

The animal spirits theory provides a causal chain that connects movements in the stock market with subsequent changes in the unemployment rate. If this theory is correct, the path of unemployment depicted in Figure 8 is an accurate forecast of what would have occurred in the absence of Federal Reserve intervention. These results support the claim, in the title of this paper, that the stock market crash of 2008 really did cause the Great Recession.

Central banks (CBs) around the globe appear to concur with his view. Their response to the Great Recession has been the provision of abundant liquidity – via quantitative easing – at ever lower rates of interest. They appear to believe that the recovery has been muted due to the inadequate quantity of accommodation and, as rates drift below zero, its targeting.

The Federal Reserve (Fed) was the first to recognise this problem, buying mortgages as well as Treasuries, perhaps guided by the US Treasury’s implementation of TARP in October 2008. The Fed was fortunate in being unencumbered by the political grid-lock which faced the European Central Bank (ECB). They acted, aggressively and rapidly, hoping to avoid the policy mistakes of the Bank of Japan (BoJ). The US has managed to put the great recession behind it. But at what cost? Only time will tell.

…click on the above link to read the rest of the article…

Let Me Tell You About the Very Rich

April 7, 2016

Let Me Tell You About the Very Rich

The Panama Papers highlight, with painstaking clarity, that austerity is not a shared sacrifice.

It’s not like we didn’t know what was going on. But the “Panama Papers,” the largest-ever document leak and one that implicates political leaders and business executives around the world, confirms it — cementing a widespread distrust of public and private institutions in the global economy.

It remains to be seen whether the scale of the revelations, whose full scope is only slowly starting to emerge, will be a catalyst for positive change or just more fodder for curmudgeonly conspiracy theorists. But one thing is clear: The debate over global economic policy is going to be deeply affected for a while to come.

The epic document dump, which includes 11.5 million files from the Panamanian law firm Mossack Fonseca, implicates a string of world leaders, their families, and close associates in an intricate web of shell companies constructed for the sole purpose of hiding money from tax authorities.

Following the Great Recession and world financial meltdown, policymakers have fallen broadly into two camps: those who see a significant role for official intervention through fiscal and monetary stimulus policies, and those who see government as the problem and push for structural changes to push it out of the way.

Both Europe and the United States imposed considerable austerity on government finances despite prevailing modern economic thinking suggesting governments should spend more, not less, in times of economic weakness.

This budget-cutting approach to exiting the economic crisis, predicated on the dubious notion that fiscal prudence will boost confidence and hence growth, was sold to the public as a shared sacrifice across society. But as the Panama Papers appear to show, the very wealthy play by an entirely different set of rules than the average person when it comes to paying taxes.

…click on the above link to read the rest of the article…

My Passion is Puppetry

April 6, 2016

My Passion is Puppetry

Campaign	Company	Launch Date
“Flo”	Progressive Insurance	2008
“Rhetorical Question” “Happier Than A … ” “Did You Know?” “It’s What You Do”	GEICO	2009 2012 2013 2014
“Mayhem”	Allstate	2010
“University of Farmers”	Farmers Insurance	2010
“Magic Jingle”	State Farm	2011 2011
“That’s Not How It Works”	Esurance	2014
“Chicken Parm You Taste So Good”	Nationwide	2014

We are supposedly living in the Golden Age of television. Maybe yes, maybe no (my view: every decade is a Golden Age of television!), but there’s no doubt that today we’re living in the Golden Age of insurance commercials. Sure, you had the GEICO gecko back in 1999 and the caveman in 2004, and the Aflac duck has been around almost as long, but it’s really the Flo campaign for Progressive Insurance in 2008 that marks a sea change in how financial risk products are marketed by property and casualty insurers. Today every major P&C carrier spends big bucks (about $7 billion per year in the aggregate) on these little theatrical gems.

This will strike some as a silly argument, but I don’t think it’s a coincidence that the modern focus on entertainment marketing for financial risk products began in the Great Recession and its aftermath. When the financial ground isn’t steady underneath your feet, fundamentals don’t matter nearly as much as a fresh narrative. Why? Because the fundamentals are scary. Because you don’t buy when you’re scared. So you need a new perspective from the puppet masters to get you to buy, a new “conversation”, to use Don Draper’s words of advertising wisdom from Mad Men. Maybe that’s describing the price quote process as a “name your price tool” if you’re Flo, and maybe that’s describing Lucky Strikes tobacco as “toasted!” if you’re Don Draper. Maybe that’s a chuckle at the Mayhem guy or the Hump Day Camel if you’re Allstate or GEICO.

…click on the above link to read the rest of the article…

The Other Problem with Debt No One is Talking About

April 4, 2016

The Other Problem with Debt No One is Talking About

Nearly 7 years have elapsed since the official end of the Great Recession. By now it’s painfully obvious the rising tide of economic recovery has failed to lift all boats. In fact, many boats bottomed out on the rocks in early 2009 and have been taking on water ever since.

Last week, for instance, it was reported that U.S. credit card debt topped $714 billion in the third quarter of 2015. That’s up $34 billion from the year before. Shouldn’t the economic recovery allow consumers to pay down their debts?

Indeed, it should, if only the economic recovery was the result of real, economic growth. To the contrary, the recovery has been faux growth driven by cheap Fed credit and financial engineering. Mutual increases in prosperity haven’t occurred.

In particular, those outside the financial services business, and other bubble industries, like government lobbyists, have largely missed out on any increase in income or living standard. Good paying professional jobs that vaporized during the downturn have been replaced with low paying service jobs. Consumers have used credit card debt to pick up the slack.

Unfortunately, this short term solution sets up consumers for pain in the future. At some point, as debt increases faster than incomes, the ability to pay down the principle becomes near impossible. Even making the minimum payment becomes more and more difficult as new debt is added to the burden each month.

Playing with Fire

“We’re playing with fire now,” said Odysseas Papadimitriou, chief executive of credit statistics and analysis site CardHub. “Either an unexpected economic downtown or the continuation of current spending and payment trends could be enough to unleash an avalanche of defaults.”

…click on the above link to read the rest of the article…

The Other Problem with Debt No One is Talking About

April 1, 2016

The Other Problem with Debt No One is Talking About

Faux Growth Recovery

Last week, for instance, it was reported that U.S. credit card debt topped $917 billion in the fourth quarter of 2015. That’s up $71 billion from the year before. Shouldn’t the economic recovery allow consumers to pay down their debts?

Annual increase in credit card debt load….via cardhub (more data here) – click to enlarge.

Unfortunately, this short term solution sets up consumers for pain in the future. At some point, as debt increases faster than incomes, the ability to pay down the principal becomes near impossible. Even making the minimum payment becomes more and more difficult as new debt is added to the burden each month.

Playing with Fire

…click on the above link to read the rest of the article…

The Recession Isn’t a Few Months Away… It’s Already Started

February 21, 2016

The Recession Isn’t a Few Months Away… It’s Already Started

So the S&P 500 is out of correction for now and the coast is clear. NOT! This is exactly what we’ve been predicting would happen – after reaching new lows, stocks would have to bounce before they inevitably resume their longer-term trend, which is down.

But stocks haven’t been the only victims of late. Just a couple weeks ago the January nonfarm payroll report came in at 151,000 jobs. So much for the expected 190,000! And of the ones reported, they were mostly low-wage jobs.

Pile that on top of the disappointing Christmas and retail sales in December. Not to mention falling stock earnings and sales growth, the worst December-to-January stock performance to date, and another banking crisis looming in Europe, especially Italy. There’s economic weakness everywhere you look!

All of this is leading me to believe that the next recession – which will lead into an even greater DEPRESSION – is not a few months away. I think it’s already begun.

Think back to the Great Recession in 2008. By the time we figured out it had started, it was months after the fact. It officially started in January 2008, three months after the stock market peaked in early October. And jobs didn’t peak and start to decline until four months later that May. Only then did the stock market see its sharp and deep crash between June and early November.

Well, of course it did! The jobs report is a lagging indicator! It doesn’t tell us anything about where we are now, which is probably why the Fed and markets-on-crack love it. Yet they think it’s the most important report that comes out.

…click on the above link to read the rest of the article…

Falling Oil Prices Not the Reason for U.S.’s Economic Woes

February 9, 2016

Falling Oil Prices Not the Reason for U.S.’s Economic Woes

Why Should a Decline in Oil Prices be Bad?

The dramatic fall in the global price of oil is being cited by the financial press, government officials, and academia as the catalyst for the recent abysmal U.S. economic data which shows that the economy is, in all likelihood, sliding into a recession or worse.

Oil prices in dire straits…

While falling oil prices sound like a plausible explanation for the abysmal financial numbers, anyone with a modicum of economic sense (which excludes much of the financial Establishment) can see that it is merely a smokescreen to obfuscate the real culprit.

The fall in oil prices, while detrimental to many oil producers, should actually be a boon for the rest of the economy, especially those industries that are heavily reliant on energy. Lower fuel prices mean lower production costs leading to, ceteris paribus, greater output.

The price of gasoline has declined precipitously – click to enlarge.

For consumers, lower oil prices mean lower utility bills and cheaper gasoline, both of which mean more disposable income for either savings or more consumption. Why would greater disposable income lead to a recession?

Naturally, lower prices are not good for oil producers. But a decline in one sector of the economy (albeit an important one), does not lead to a general collapse. While the energy sector may be contracting, industries that use fuel should be able to expand as their production costs fall.

What constitutes great news in oil exploration nowadays

The Pseudo-Prosperity of the Printing Press

The Federal Reserve’s Quantitive Easing (QE), Zero Interest Rate Policy (ZIRP), Operation Twist (OT), and their variations have created a massive bubble in asset prices which is now beginning to burst.

…click on the above link to read the rest of the article…

Rewardless Risk

February 2, 2016

Rewardless Risk

Faramir:	Then farewell! But if I should return, think better of me.
Denethor:	That depends on the manner of your return.

– J.R.R. Tolkien “The Lord of the Rings” (1954)

I’m going full-nerd with the “Lord of the Rings” introduction to today’s Epsilon Theory note, but I think this scene — where Denethor, the mad Steward of Gondor, orders his son Faramir to take on a suicide mission against Sauron’s overwhelming forces — is the perfect way to describe what the Bank of Japan did last Thursday with their announcement of negative interest rates. The BOJ (and the ECB, and … trust me … the Fed soon enough) is the insane Denethor. The banks are Faramir. The suicide mission is making loans into a corporate sector levered to global trade as the forces of global deflation rage uncontrollably.

Negative rates are an intentional effort to weaken your own country’s banks. Negative rates are a punitive command: go out there and make more bad loans where risk is entirely uncompensated, or we will, in effect, fine you. The more bad loans you don’t make, the bigger the fine. Negative rates are only a bit worrying in today’s sputtering economies of Europe, Japan, and the US because the credit cycle has yet to completely roll over. But it is rolling over (read anything by Jeff Gundlach if you don’t believe me), it is rolling over everywhere, and when it really starts rolling over, any country with negative rates will find it to be significantly destabilizing for their banking sector.

There’s a reason that the Fed kept paying interest on bank reserves even in the darkest, most deflationary days of the Great Recession. Yes, it’s the Fed’s job to support full employment. Yes it’s the Fed’s job to maintain price stability.

…click on the above link to read the rest of the article…

Cashless Society War Intensifies During Global Epocalypse

January 24, 2016

Cashless Society War Intensifies During Global Epocalypse

In the fall of 2015, the world descended into an economic apocalypse that will transform the globe into a single cashless society. This bold prediction is based on trends in nations all over the earth as shown in the article below.

As we enter 2016, we are only beginning to see this Epocalypse form through the fog of war. The war I’m talking about is the world war waged furiously by central banks against the Great Recession as the governments they supposedly serve fiddled while their capital burned.

The governments and banks of this world advanced rapidly toward forming cashless societies throughout 2015. The citizens of some countries are already embracing the move. In other countries, like the US, citizens fear the loss of autonomy that would come from giving governments and their designated central banks absolute monetary control.

The Epocalypse that I’ve been describing in this series will overcome that resistance during 2016 and 2017 as it wrecks economic havoc to such a degree that cash hold-outs will be ready for whatever holds the greatest promise of saving them from their collapsed monetary systems, fallen banks, deflated stocks and suffocating debt. One has only to think about how quickly and readily American citizens forfeited their constitutional civil liberties after 9/11 when George Bush and congress decreed that search warrants were not necessary if the government branded you a “terrorist.”

If this sounds like some wild conspiracy theory, consider the following: no less Sterling standard of global economics than The Economist predicted thirty years ago that by 2018 a global currency would rise like the phoenix out of the ashes of the world’s fiat currencies:

THIRTY years from now, Americans, Japanese, Europeans, and people in many other rich countries, and some relatively poor ones will probably be paying for their shopping with the same currency.

…click on the above link to read the rest of the article…

The Global Monetary Non-System

January 6, 2016

The Global Monetary Non-System

NEW DELHI – As 2015 ended, the world boasted few areas of robust growth. At a time when both developed and emerging-market countries need rapid growth to maintain domestic stability, this is a dangerous situation. It reflects a variety of factors, including low productivity growth in industrial countries, the debt overhang from the Great Recession, and the need to rework emerging markets’ export-led growth model.

So how does one offset weak demand? In theory, low interest rates should boost investment and create jobs. In practice, if the debt overhang means continuing weak consumer demand, the real return on new investment may collapse. The neutral real rate identified by Knut Wicksell a century ago – loosely speaking, the interest rate required to bring the economy back to full employment with stable inflation – may even be negative. This explains central banks’ attraction to unconventional monetary policy, such as quantitative easing. The evidence that these policies boost domestic investment and consumption is mixed, at best.

Another tempting way to stimulate demand is to increase government infrastructure spending. In developed countries, however, most of the obvious investments have already been made. And while everyone can see the need to repair or replace existing infrastructure (bridges in the United States are a good example), badly allocated spending would heighten public anxiety about the prospect of tax hikes, possibly increase household savings, and reduce corporate investment.

Arguably, industrial countries’ growth potential had fallen even before the Great Recession. Former US Treasury Secretary Larry Summers popularized the phrase “secular stagnation” to describe weak aggregate demand caused by aging populations that want to consume less and the increasing income share of the very rich, who are unlikely to increase their already-large consumption.

…click on the above link to read the rest of the article…

The Great Malaise Continues

January 3, 2016

The Great Malaise Continues

NEW YORK – The year 2015 was a hard one all around. Brazil fell into recession. China’s economy experienced its first serious bumps after almost four decades of breakneck growth. The eurozone managed to avoid a meltdown over Greece, but its near-stagnation has continued, contributing to what surely will be viewed as a lost decade. For the United States, 2015 was supposed to be the year that finally closed the book on the Great Recession that began back in 2008; instead, the US recovery has been middling.

Indeed, Christine Lagarde, Managing Director of the International Monetary Fund, has declared the current state of the global economy the New Mediocre. Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.

In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise. Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.

The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.

At the same time, the US suffers from a milder form of the fiscal austerity prevailing in Europe. Indeed, some 500,000 fewer people are employed by the public sector in the US than before the crisis. With normal expansion in government employment since 2008, there would have been two million more.

…click on the above link to read the rest of the article…

Why the Fed Is WRONG About Interest Rates

December 17, 2015

Why the Fed Is WRONG About Interest Rates

Richard Werner – an economics professor and the creator of quantitative easing – says that it’s a myth that interest rates drive the level of economic activity. The data shows that the opposite is true: rates lagthe economy.

Economics prof Steve Keen – who called the Great Recession before it happened – points out today in Forbes that the Fed’s rate dashboard is missing crucial instrumentation:

The Fed will probably hike rates 2 to 4 more times—maybe even get the rate back to 1 per cent—and then suddenly find that the economy “unexpectedly” takes a turn for the worse, and be forced to start cutting rates again.

This is because there are at least two more numbers that need to be factored in to get an adequate handle on the economy: 142 and 6—the level and the rate of change of private debt. Several other numbers matter too—the current account and the government deficit for starters—but private debt is the most significant omitted variable in The Fed’s toy model of the economy. These two numbers (shown in Figure 2) explain why the US economy is growing now, and also why it won’t keep growing for long—especially if The Fed embarks on a period of rate hiking.

Figure 2: The two key numbers The Fed is ignoring

[T]he dilemma this poses for The Fed—a dilemma about which it is blissfully unaware—is that a sustained growth rate of credit faster than GDP is needed to generate the magic numbers on which it is placing its current wager in favor of higher interest rates.

The Fed, along with all mainstream economists, dismisses this argument on the basis that the level of private debt doesn’t matter to the macroeconomy: for every debtor who can spend less because of higher rates, there is a saver who can spend more, so the two effects cancel out.

…click on the above link to read the rest of the article…

Have We Hit Peak Inequality?

December 14, 2015

Have We Hit Peak Inequality?

These 400 billionaires are wealthier than 190 million of their fellow Americans.

When should we be alarmed about so much wealth in so few hands?

The Great Recession and its anemic recovery only deepened the economic inequality that’s drawn so much attention in its wake. Nearly all wealth and income gains since then have flowed to the top one-tenth of America’s richest 1 percent.

The very wealthiest 400 Americans command dizzying fortunes. Their combined net worth, as catalogued in the 2015 Forbes 400 list, is $2.34 trillion. You can’t make this list unless you’re worth a cool $1.7 billion.

These 400 rich people — including Bill Gates, Donald Trump, Oprah Winfrey, and heirs to the Wal-Mart fortune — have roughly as much wealth as the bottom 60 percent of the population, or over 190 million people added together, according to a new report I co-authored.

That equals the wealth of the nation’s entire African-American population, plus a third of the Latino population combined.

Forbes Magazine Cover

A few of those 400 individuals are generous philanthropists. But extreme inequality of this sort undermines social mobility, democracy, and economic stability. Even if you celebrate successful entrepreneurship, isn’t there a point things go too far?

To me, 400 people having more money than 190 million of their compatriots is just that point.

Concentrating wealth to this extent gives rich donors far too much political power, including the wherewithal to shape the rules that govern our economy. Half of all political contributions in the 2016 presidential campaign have come from just 158 families, according to research by The New York Times.

The wealth concentration doesn’t stop there. The richest 20 individuals alone own more wealth than the entire bottom half of the U.S. population.

This group — which includes Gates, Warren Buffet, the Koch brothers, Mark Zuckerberg, and Google co-founders Larry Page and Sergey Brin, among others — is small enough to fit on a private jet. But together they’ve hoarded as much wealth as 152 million of their fellow Americans.

…click on the above link to read the rest of the article…

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