Wednesday, June 24, 2015

the crash of 2015 - on track, behind schedule...,


dailyimpact |  The dominoes are toppling, just as we have been expecting for nearly a year now, but slower than we thought. The fact-resistant strain of humans (Thank you, Borowitz Report) now in charge of the world are trying to use vast amounts of money to counteract gravity, and, counterintuitively, succeeded in slowing the dominoes’ fall. But not for long.

To review our expectations of last summer: the hideous decline rate of fracking wells (of up to 90% in three years) was forcing frackers to borrow huge amounts of money to put up large numbers of new wells at a breakneck pace in order to preserve the illusion (it was always an illusion) of a revolution in American oil leading to prosperity and “energy independence.” On average, it cost the frackers over $4 to get $1 of revenue in the door during the first quarter of this year. A year ago, with oil commanding $100 a barrel, they were still spending $2. As the old joke goes, the only way to make any money when you’re losing on every transaction is to make up for it with volume. But since most of the money spent was capital expenditure — i.e. new wells — their operating statements showed profits and nobody looked at the balance sheets.

We ran this scenario on our abacus and concluded that these guys were going to go broke. And that when they did, not only would U.S. oil production resume its long slide toward zero, begun in 1970, but they would blow up the junk-bond market, almost certainly the bond market, and probably the stock market. These expectations were in place before the price of oil tanked last fall, and set the expectations in concrete.

Now, let’s review the state of play: