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Saturday, July 12, 2014

Mike Stasse: The Crash Rachets Up

Mike Stasse writes from Australia:

It’s often been said among Peakniks that ‘the crash’ is not an event that will occur smoothly or suddenly, but rather in steps… so a sudden downturn like what happened when the GFC first hit would hit a low, followed by perhaps another rise at best, or a plateau. Then another sharp downturn would shape the next step down to an even lower plateau. How long these plateaus last of course is anyone’s guess, and they are at the mercy of events. Who can guess what might happen in the Middle East next?

Just such a downturn may now not be far away.

Bank lending, it seems, has been setting new records since mid-2013, especially in the USA. If the last credit bubble – when too many dodgy loans were made by overenthusiastic loan officers before it all blew up in 2008 – was spectacular, this one is even more so….. Based on the loose principle that the US economy can only grow if bank lending balloons, it appears that the lowering ERoEI of the oil industry may be at its core.

This is what the auspicious chart of core bank loans outstanding looks like (via OtterWood Capital Management):

This time around, economists have been using the borrowing binge as proof that investment was suddenly picking up, that these investments would filter into economic growth, and that after all this time of mirages and sour disappointments, the ever elusive “escape velocity” would finally come……..

It turns out that that jump in investment – powered by bank lending, investment is a code word for debt – that economists have so enthusiastically shown as ‘proof of return to normal’ has been nothing but an illusion. And no, it wasn’t some blogger spouting off pessimistic data, but the Financial Times, quoting such sources as “senior executives” inside major US banks who “are privately warning” that this new lending binge “should not be seen as evidence of an economic recovery.”

Instead, much of the borrowed money was used “to fund payouts to shareholders” via dividends (remember Shell..?) and stock buybacks and to “finance acquisitions,” the source said. None of these activities are productive, in fact, these acquisitions lead companies to boast about synergies and labour efficiencies – that is, redundencies – at either end, as these businesses get consolidated.

And here’s the sting…… Part of that borrowed money is being ploughed into the American fracking boom where drillers on the terrible treadmill that fracking really is have to contend with terribly sharp depletion rates, forcing them to drill ever more wells just to maintain production. And they can never get off that treadmill because production would soon collapse if they did, and with each new well they have to borrow more, and then they require more production just to service the ballooning debt. Revenues have risen 5.6% over the last four years while debt that drillers have piled on has nearly doubled [read... The Fracking Shakeout].

Watch this space, things might get awfully interesting soon…… because as soon as Peak Fracking hits, and that is bound to happen before 2020, all hell will break loose.