Yesterday, we watched as more than 30 years’ worth of flies…dogs…and goats wriggled and jiggled inside the financial markets.
The day began…and got worse…and then settled down with a 2,014-point loss for the Dow. It was its worst day since 2008. And as it turned out, yesterday was also the worst day for the oil market since 1991.
What is to blame?
Appalling act by the feds
In 16th-century England, a performer warmed up the crowd for a Shakespeare play by eating a live chicken — feathers and all.
Now before us is an even more appalling act. The feds are swallowing the entire economy.
This is the story we’ve been watching for two decades.
The Federal Reserve’s grifters swallowed the academic claptrap. They claimed they could manage the economy by falsifying interest rates…and ‘stimulate’ it with fake money. And the public was ready to swallow anything, if there was free money involved.
Then, each time the economy or the markets tried to correct, the feds intervened with more ‘stimulus.’
This inevitably caused more wriggling and jiggling inside the economy…and then they had to swallow something even bigger to try to stop it.
Let’s look at the oil industry as an example…
Swallowed by fake money
We reported more than a year ago that the U.S. shale oil industry was a bubble created by the Fed’s ultra-low interest rates. Producers borrowed huge amounts of capital, fracked the hell out of vast areas of the U.S., and consistently lost money!
In effect, the U.S. oil industry was swallowed by the Fed’s fake-money/fake-interest-rates policies.
As long as they could borrow money cheaply enough…it didn’t seem to matter that they lost money. Like tech companies Tesla, Uber, Twitter, and Snapchat, the frackers were able to keep fracking.
Finally, last year, OilPrice.com reported that the industry might soon turn a profit:
According to the World Energy Investment 2019 report, positive free cash flow should be reached because of three factors, implying the current WTI [West Texas intermediate] price of $60 per barrel doesn’t decline significantly.
Whoa! But this week, $60 oil gave way to $30 oil. (Goldman Sachs says it could go to $20.)
Bloomberg elaborates:
Shale’s New Reality: Almost All Wells Drilled Now Lose Money
America’s shale producers already had a profitability problem. It just got worse.
The shale industry has some $71 billion in loans to repay over the next seven years. That’s going to be impossible at today’s low oil prices. And it’s not just a problem for the shale industry…
That $71 billion in loans makes up a big chunk of the whole low-grade bond market. If the bonds of the oil producers go bad…the whole dodgy, junk bond market will also need to be swallowed up.
Then, it won’t be long before some major banks and other financial institutions — who hold junk bond debt for the higher yields — go down the Fed’s gullet too.
Debt binge by the feds
A Bloomberg headline tells us:
Coronavirus Exposes the Danger of Corporate America’s Debt Binge
But don’t you worry, Dear Reader. There’s no natural calamity that the feds can’t make worse.
They’re not going to throw up their hands…admit they should never have queered the economy so badly…and back off.
Nope. They’re going to tell us that our national security depends on keeping the frackers in business.
Right this moment, the Trump Team is conferring with the usual hinds, and developing policy options to keep the scam going. The New York Times:
Trump to work with Congress to boost economy
Don’t start laughing yet, Dear Reader. The joke is just beginning.
Government regulatory agencies say they will work with banks to keep the money flowing to their key industries. And the Fed, too, said it will provide more ‘Repo Madness’ money (short-term financing). CNBC:
The New York Federal Reserve said Monday that it will increase the amount of money it is offering to banks for their short-term funding needs.
As part of its continuing efforts to make sure the funding, or repo, markets are working properly, the central bank said it will up the amount it offers in overnight operations from $100 billion to $150 billion through Thursday.
In addition, it will increase the two-week repo operation offerings from at least $20 billion to at least $45 billion.
And then, the president showed up in the news again, with another bonehead move:
Trump Floats Payroll Tax Cut After Market Plunged on Virus Fears
‘Inflate-or-Die’ economy
We remind readers: The feds have no money.
They can only provide tax relief by borrowing more fake money — which is how the economy’s immune system got compromised in the first place.
So, you see…
There are still plenty of goats, sheep, elephants, and jackasses to be swallowed. The feds will get to most of them…causing more jiggling and wriggling and tickling.
This will keep the show going for a few years.
Then, after all the chickens have been eaten — the tax cuts, the infrastructure spending programs, the free money, the cash for clunkers, negative rates, direct purchase of equities, Modern Monetary Theory (MMT), $2 trillion budget deficits…
…after debt has soared much higher…
…and stocks have whipsawed around trying to keep up with the madness…
…and consumer price inflation has finally caught up with the feds’ destruction of the dollar…
Then, the old lady will die.
Regards,
Bill Bonner