A Black Swan Emerges Covered in Cheap Oil

Low Oil Prices and Russia.

Crumbling Oil Prices May Be the Black Swan That Exposes The Fake Economy Driven By Artificially Low Interest Rates.

Is a 2008 style sub prime mortgage bust/financial crisis covered in cheap oil redux coming?

Is the shale oil bust the black snowflake that sets off the avalanche?

The Lowest Cost. Period.

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black swan photo

Are low oil prices the black swan that sink the financial system?

Podcast Summary:

0:00-6:10 Introduction/Discussion of Budget Wrangling/Manipulated Markets

Oil Drops Below $60 a Barrel – The Implications

6:10 – 9:25 The Fed, despite the odds has been firmly in control of the economy and interest rates. Until, perhaps now. Low oil prices add a deflationary component to the economy- something the Fed does not want.

The drop in the price of oil of 40%+ in a few months is not just a sign of decreased demand but manipulation of the oil supply by Saudi Arabia and OPEC.

Are Lower Oil Prices the Result of a Directive from The U.S. to Saudi Arabia to Harm Russia?

9:25-10:30 the possibility that the US directed Saudi Arabia to lower oil prices to harm that “gas station masquerading as a country, Russia.” is discussed. The petro dollar arrangement is discussed. The U.S. supports Saudi Arabia with military defense and by attacking their enemies and Saudi Arabia prices its oil in dollars and accepts only dollars as payment creating demand for dollars.

Or is Saudi Arabia Lowering Oil Prices to Cripple the Competing U.S. Shale Oil Industry?

10:30-13:45 the impact of lower oil prices on the U.S. shale oil industry is discussed.

If shale oil takes off, the U.S. solves three issues:

– becomes energy independent;
– creates jobs; and
– no longer needs Saudi Arabia to create demand for the dollar because the export of shale creates its own demand for dollar and replaces much of the Saudi Arabian demand.

Since Saudi Arabia has only one card to play – oil, they can’t allow the U.S. to make them less relevant through shale oil competition.

The shale oil industry has been funded by hundreds of billion of dollars in low interest rates loans on the assumption that they would sell oil at $70+ a barrel. What happens if the shale oil companies can’t make back their investment and are unable to service their debt?

The Impact of Lower Oil Prices on Consumers and the Economy

13:45-14.35 the impact of lower oil prices on consumers is discussed. The impact will be temporary, perhaps 6-8 months, before prices rise again because the lower prices are not market driven.

Impact of Artificially Low Interest Rates on the Shale Oil Industry – False Signal/Malinvestment and Bust?

14:35 – 15:50 the artifically low interest rates induced many shale oil companies to borrow massive amounts, perhaps more than they otherwise might have if rates were at higher market levels. The shale oil companies also probably did not model what their businesses would look like if oil dropped to $60 a barrel.

The cheerleading media seems to be characterizing the lower prices as good for consumers and even good for the shale oil industry because shale oil companies will cut back in production causing supply to be constrained and the price to rise again. WRONG! The oil market, while subject to supply/demand dictates gets its price on the basis of manipulated OPEC supply and if OPEC wants the price to stay low they will merely add more supply to compensate for the lost shale oil supply.

2008- Sub Prime Mortgage Bust Redux- Covered in Oil

A fracking mess?

15:50- 18:15 discussion of the potential impact of a shale oil industry implosion. Currently, the media is treating lower oil prices as a good thing – even though it runs counter to the narrative that the economy needs higher prices.

Would the government bail out the shale oil companies?

If Shale Fails, Bail?

18:15-21:05 The media is touting the low gas prices as benefiting consumer spending and spending at restaurants. Lower prices do stimulate consumption. No one is not filling up their car waiting for lower gas prices next week.

Freddie Mac and Fannie Mae Bring in The Fences – Will Provide Mortgages with Just 3% Down

21:05-23:50 discussion of the new misguided policies of Freddie Mac and Fannie Mae.

Manipulation Meets Manipulation

23:50-26:55 what happens when OPEC manipulation comes up against Fed manipulation? When does the Fed lose control? Discussion of the U.S. relationship with Saudi Arabia under the Nixon/Bush administrations (hand holding and kissing) to the less cordial relations under the Obama administration.

Interest Rates

26:55-29:54 direction of interest rates is discussed. The market is STILL expecting higher interest rates. The mortgage industry is warning of higher rates next year to drive a rush to get mortgages. Fed excuses not to raise rates will be offered next year. Mortgage applications are down year over year despite, lower interest rates, higher GDP and supposed job growth.

Retail Sales: “Solid”

Discussion of the retail sales numbers that beat expectations and how the major news wires all call the numbers “solid”.

What can the Fed do if lower oil prices persist and create deflation? They won’t be able to raise rates as the dollar would strengthen.

The Economic Truthers

29:54- 33:34 discussion of a recent New Yorker Magazine article that characterizes those that think Obamacare has raised insurance premiums and don’t think there is an economic recovery as “economic truthers”. This topic is covered more extensively by Peter Schiff here. Discussion of Freddie Mac’s interpretation of the economy.

Initial Jobless Claims

33:34-35.49 Jobless claims are lower because the labor market is decreasing and there are fewer people left to fire. Discussion of manipulaton of economic data and the deflationary impact of lower oil prices on the entire economy.

The Amazon Business Model

35.49-43:20 the non profitable Amazon business model and predatory pricing are discussed. Amazon is rewarded by Wall Street to lose money. Costco’s business model is also discussed.

The Best Thing About Today’s Economy – The Media Propaganda

43:20-53:00 the current state of the economy is discussed. The best thing about today’s economy- low oil prices are not a product of U.S. monetary or fiscal policies. The economic cheerleaders in the media are once again touting millennials as representing pent up housing demand.

Fed policy has moved the money towards the older and richer and wonder why millennials are not buying homes like they want them to. Rising home prices are constantly touted as a good thing and encouraged by monetary policy.

The labor market has undergone a structural change to part time job growth but the reporting by the Bureau of Labor Statistics and the media do not recognize any such change or report on the details.

The reason Republicans took over the Senate was because of the economy, not because voters like Republicans. The job numbers are a kick in the face to job seekers and those with part time jobs. Voters are not as stupid as Jonathan Gruber claims they are. Even a dog knows the difference between being stepped on and kicked.

3% Down Mortgages

53:00 Three percent mortgage are discussed again. Lowering mortgage standards does not change the underlying cause of low home sales. If three percent mortgages don’t spur demand, perhaps they will go to no money down and if that doesn’t work, perhaps the government will pay the down payment.

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A Black Swan Emerges Covered in Cheap Oil

Further Reading:

Why Saudi Arabia Matters in Helping to Keep the Dollar as the World’s Reserve Currency

The Dark Side of Artificially Low Interest Rates

Initial Jobless Claims Misinterpretation

Silver Eagle Sales Set Record in 2014

Predatory Pricing

Waiting for Household Formation

Millennials Not Part of the Club Yet

The Dark Side of Rising Home Prices

Royal Canadian Mint

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