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Submitted by Raul Ilargi Meijer of The Automatic Earth blog,

Oil producer Russia hikes rates to 10.5% as the ruble continues to plunge, while fellow producer Norway does the opposite, and cuts its rates, but also sees its currency plummet. As Greek stocks lose another 7.35% after Tuesday’s 13% loss on rumors about what the left leaning Syriza party will or will not do if it wins upcoming elections, and virtually anonymous Dubai drops 7.42%. We all know the story of the chain and its weakest link, and beware, these really still ARE global markets.

Meanwhile someone somewhere saved WTI oil from falling through the big, BIG, $60 limit for most of the day Thursday, and then it went south anyway. And that brings to mind the warnings about what would, make that will, happen to high yield energy junk bonds. Of which there’s a lot out there, but not much is being added anymore, that market has been largely shut to companies, especially in the shale patch. So how are they going to finance their fracking wagers? Hard to see.

And something tells me this Bloomberg piece is still lowballing the debt issue, though I commend them for making the link between shale and Fed ‘stimulus’ policies, something all too rare in what passes for press in the US these days.

Fed Bubble Bursts in $550 Billion of Energy Debt

The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt. Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights predicts the default rate for energy junk bonds will double to 8% next year. “Anything that becomes a mania – it ends badly,” said Tim Gramatovich, chief investment officer of Peritus Asset Management. “And this is a mania.”

I think it’s obvious that the default rate could be much higher than 8%.

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis. Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44% to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

 

Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5% this week from 5.7% in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services, postponed financings this month as sentiment soured. “It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.

When you’re as addicted to debt as the shale industry has been – and still would be if they could still get their fix -, then seeing prices for your products drop over 40% and the yields on your bonds just about double (just for starters), then you have not a problem, but a disaster. And one that’s going to reverberate through all asset markets. It’s already by no means just oil that’s plunging, – industrial – commodities (iron ore, nickel, copper etc.) as a whole are way down from just a few months ago. I read a nice expression somewhere: “the economy is topped with a copper roof”, which supposedly means to say that where copper goes, the economy will follow.

But this is by no means all of the news, it’s not even the worst. To get back to oil, there are some very revealing numbers in the following from CNBC, which call out to us that we haven’t seen nothing yet.

Oil Pressure Could Sock It To Stocks

With crude sliding through the key $60 level, oil pressure could stay on stocks Friday. West Texas Intermediate futures for January closed at $59.95 per barrel, the first sub-$60 settle since July 2009. The $60 level, however, opens the door to the much bigger, $50-per-barrel level. Besides oil, traders will be watching the producer price index Friday morning, and it’s expected to be off 0.1% with the fall in energy. Consumer sentiment is also expected at 10 a.m. EST.

 

Consumers stepped up and spent in November, as evidenced in the 0.7% gain in that month’s retail sales Thursday. That better mood should show up in consumer sentiment. Stocks on Thursday gave up sizeable gains after oil reversed course and fell through $60.

 

“Oil has pretty much spooked people,” said Daniel Greenhaus, chief global strategist at BTIG. “There just isn’t a bid. With everything in energy and the oil price collapsing as it is, who is going to step in and be a buyer now? The answer is nobody.” Oil continued to slide in after-hours trading. “The selling appears to have accelerated a little bit after the close with really no bullish news in sight,” said Andrew Lipow, president of Lipow Associates. WTI futures temporarily fell below $59 in late trading.

 

“The big level is going to be $50 now in terms of psychological support. Much as $100 is on the upside,” said John Kilduff of Again Capital. Oil stands a good chance of getting there too. Tom Kloza, founder and analyst at Oil Price Information Service, said the market could bottom for the winter in about 30 days, but then it will be up to whatever OPEC does.

That was just the intro. Now, wait for it, check this out:

“It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza.”The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel.”

 

“Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday.

 

“In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.

I see very little reason to doubt that what’s happening is that the media are way behind the curve in their reporting of what’s really going on. WTI and Brent are standards, and standards are one thing, but what oil actually sells for is quite another matter. Many companies – and many oil-producing countries too – must sell at whatever price they can get just to survive. And there is no stronger force in the world to drive prices down.

That is today’s reality. And while there are many different estimates around about breakeven prices for US shale plays, if we go with the ones from WoodMacKenzie, we get at least some idea of how bad the industry is hurting with prices below $60 (click to enlarge):

If prices fall any further (and what’s going to stop them?), it would seem that most of the entire shale edifice must of necessity crumble to the ground. And that will cause an absolute earthquake in the financial world, because someone supplied the loans the whole thing leans on. An enormous amount of investors have been chasing high yield, including many institutional investors, and they’re about to get burned something bad.

What it amounts to is that the falling oil price will chase a lot of zombie money out of the markets, the stuff created through a combination of QE-related ultra low interest rates and money printing, plus the demise of accounting standards that allowed companies to abandon mark-to-market practices. This has led to the record stock market valuation that we see today, and that could vanish in the wink of an eye once even just one asset, one commodity, starts being marked to market in defiance of the distortion official policies have imposed upon the global marketplace.

We might well be looking at the development of a story much bigger than just oil. I said earlier this week that it would be hard to find a way to bail out the US oil industry, but that’s merely one aspect here. Because if oil keeps going the way it has lately, the Fed may instead have to think about bailing out the big Wall Street banks once again.

via Zero Hedge http://ift.tt/1DpquB7 Tyler Durden

You know the Central-Bank-driven wealth-creation narrative has gone too far when… CNN Money – the bastion of personal financial advice introduces us to Mohammad Majd, graduate who opines "I changed my entire philosophy on debt. I started making minimum payments on my student loans, picked up a "Stock Investing for Dummies" book, and put whatever extra money I made into the stock market." It's great any muppet can win… "It was a really good feeling knowing that I could wipe away my entire student loan debt with just a few mouse clicks." This is how broken the market (and the mindset) has become…

 

Via CNN Money,

When Mohammad Madji graduated from Drexel University in 2009 with a degree in engineering, he was 23 and had $200 in his bank account.
In other words, he was like most American college students: Poor and in debt.

The loan burden: My mother was overly ambitious in helping me and put a lot of my tuition payments on her credit card; as a result, she ended up claiming bankruptcy my senior year.

 

My roommates each had over $100,000 to repay. One of them currently waits tables on weekends on top of having a full-time engineering job. He's been doing it since we graduated in an admirable effort to pay down his student loan debt.

 

When I started my career, my monthly student loan payments came to $460. My entry-level engineering job paid $48,000 a year. I was better off than most. My payments were inconvenient but still manageable.

And so he began his long road to deb serfdom…

Paying down debt: Aside from moving out of that studio and into a small two-bedroom apartment, I maintained the same modest lifestyle I had while I was a student. A lot of my friends were still struggling to find jobs, so there wasn't much social pressure on me to get a new car, a nice apartment or eat out at fancy restaurants.

 

I began attacking my student loans by making double and triple payments. Like a lot of other recent graduates, I was conditioned to fear debt, and I made a point to get rid of it as soon as possible.

 

Coming out of school just after the financial crisis had a big impact on me. I wanted to know what had just happened and why my friends weren't getting the jobs they deserved, so I started reading a lot about the crisis and about economics in general.

Then his life changed… One important concept that I came across was Opportunity Cost — the notion of quantifying what you give up when you chose one option over another. I asked myself: Why am I rushing to pay off loans with 3% to 6% interest rates when the S&P has historically returned 11%?

Game changer: I changed my entire philosophy on debt. I started making minimum payments on my student loans, picked up a "Stock Investing for Dummies" book, and put whatever extra money I made into the stock market.

 

I was a novice investor, but I bought at a time when a lot of other people were discouraged from investing in 2009 and 2010. Consequently, I was able to buy stocks at bargain prices.

 

When I turned 26, I noticed something astonishing My student loan debt and the money in my investment account had converged to the same amount — $35,000. It was a really good feeling knowing that I could wipe away my entire student loan debt with just a few mouse clicks, but I opted to continue making minimum payments.

 

By paying the minimum, it would take me eight years to pay off all my loans.

 

…

 

After eight years, I would have $75,000 (assuming an annual return of 10%).

 

Sure, that is simplifying it a bit. Obviously, the stock market doesn't return 10% every year on the dot. These numbers also don't take taxes into account. Student loan interest is tax-deductible up to $2,500, and capital gains is 0% for anyone who taxed at the 10% to 15% rate.

 

The options will be slightly different for everyone. Depending on the interest rate and life of the loan, reducing debt might be the best option.

 

…

Today I am well on my way to paying down my student debt, but I also have tens of thousands in stock market gains.

 

I'm glad I did the math.

*  *  *
Wow!!! One quick question, Mohammad:

What would have happened if you graduated in say 2007 or 2008 and started your speculate-your-way-out-of-student-debt plan?

Never mind…

*  *  *

His final lesson…

But for many of us who have grown up in modest households, we are taught to pay off debt quickly. It's not a bad lesson. But if you want to get rich, you might be better off making the minimum payment on your student loan and investing the rest.

nailed it…

*  *  *

Remember kids – debt is good, moar debt is moar good, and rampant speculation in the 'market' can only lead to riches beyond your dreams (with no downside whatsoever)… in fact, why go to college at all? Take your minimum wage burger-flippingh money and Buy double-short VIX ETFs…

via Zero Hedge http://ift.tt/1yKAp1l Tyler Durden

Authored by Brian Domitrovic, originally posted at Forbes, via Contra Corner blog,

One of the main reasons that detractors of the gold standard contend it is a “barbarous relic” (in John Maynard Keynes’s phrase) is that it was implicated in so many financial panics and economic busts back in its heyday in the 19th century. As the New York Times’ pet Internet troll once put it, sarcastically, “under the gold standard, America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. Oh, wait….returning to the gold standard is an almost comically (and cosmically) bad idea.”

Looking at the 19th century, before the gold standard became a ghost, a dead-letter in the early era of the Federal Reserve from 1913-33, there is no evidence that the good old thing was implicated in any panic or bust. Certainly not in 1873, when the United States was still contemplating returning to the gold standard that it had abrogated in the civil war the decade prior.

Certainly not in the other famous panics of the 19th century, every one of which had at its root some form of extensive government meddling in the economy.

Not the panic of 1819—caused by the misallocation ofcapital owing to the U.S.’s printing, during the War of 1812, of fiat paper currency (some of which was so transparently desperate it paid interest). Not the panic of 1837, caused by undue speculation in land sparked by Congressional goading following “Indian removal.” Not the panic of 1857—caused by a collapse in railroad shares on the basis of over-investment encouraged again by federal policy.

Which brings us to the panic of 1884. Here are yearly the economic growth statistics of the five-year run from 1882 to 1886, the mid-point being that putative panic year, 1884. (GDP is a blunderbuss statistic, but at least these reconstructions don’t have to pretend that government spending is output, in that government spending was a twelfth of what it is today.) 1882-86, yearly growth came in 5.3%, 2.8%, -1.6%, 0.3%, 8.1%. Growth over the five-year period, with 1884 at the mid-point: 9.6%. By the end of the decade, the 1880s, further 28% growth (6.2% per annum) had been tacked on.

For there to be a “major financial panic,” economic growth must take a substantial and sustained hit—as in the years after 1929 and our own cherished post-2007 era. Here we have a modest trough bounded by good growth before, and epic growth after. Take 1884 off the list.

Which brings us to 1890 and 1893. Of all the panics in American history, these are perhaps the least understood and most misrepresented—with the possible exception of the tremendous recession of 1919-21, which the Times troll most very curiously did not mention (which is OK, since none other than James Grant is on the matter).

Saying that there was a panic in 1890 is weird, in that growth was some 9% that year. In 1891, growth tumbled down, but stayed positive, at 1%. Growth surged again in 1892, to at least 10%. Then the sustained drought came: growth fell by fully 10% through 1894 and took till 1897 to recover the old trend of sustained increase.

This was the desperate panic/bust of 1893, which gave us the Haymarket riot, the Pullman strike, mass bankruptcies, and the word and very much the fact of “unemployment.” Right smack in the middle of the gold-standard era.

Or was it? It is perfectly clear what caused both the huge run-up in output numbers from 1890-92, as well as the tremendous stress on the banking and credit system that led to the drying up of investment and the shuttering of factories in 1893 and beyond. The United States, in 1890, decided to traduce the gold standard.

1890 was the year in which Congress made two of its most intrusive forays into monetary and fiscal policy in the years before the creation of the Fed and the income tax in 1913. It authorized the creation of fiat money to the tune of nearly five million dollars a month, and it passed a 50% increase in tax rates in the principal form of federal taxation, the tariff.

The monetary measure came care of the Sherman Silver Purchase Act, whereby the United States was mandated to buy, with new paper currency, an additional 4.5 million ounces in silver per month. The catch: the currency that bought the silver had to be redeemable to the Treasury in gold too.

Silver-mining interests in Nevada and elsewhere had conned (and surely bribed) Congress into this endeavor. Knowing that their extensive silver was worth little, what better way to cash in on it than get a piece of paper that says the silver can be exchanged for gold, government-guaranteed?

The cascade of new money caused an asset bubble, the tariff made sure the bubble was especially deformed, and the most extended recession of the pre-1913 period hit. The United States, needless to say, ran out of gold to back all the extra currency. J.P. Morgan had to float a gold loan to bail out his pathetic government. With the private banking system devoting its resources to backing the currency, the market got starved of cash, and the terrible recession came.

To believe that this ridiculous episode impugns the gold standard is to miss the point, and badly. Any currency that is on the gold standard can have its manager ruin the monetary system if so disposed. If you print gobs more currency than you could conceivably redeem in gold, because some con man from out West got to you, the grim creeper will come for you and your economy. So avoid that fate.

In our own era, the Fed prints excess dollars without concern that they be redeemable in gold. Which means that our capital misallocation is extensive and long-term, our recessions are long and deep, our growth trend is shallow, and our complacency about how right we are in contrast to the benighted past is callow and pitiable.

via Zero Hedge http://ift.tt/1wKcAXb Tyler Durden

Presented with no comment…

 

 

Source: Cagle Post

via Zero Hedge http://ift.tt/1A0yYsB Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

This past week I have been inundated with questions regarding the dive in crude oil prices and the energy sector in general. Is this a fantastic buying opportunity, or is the bigger of something bigger? The answer depends on your time frame.

For a speculative trader looking for a short-term opportunity, as shown in the chart below, oil is now 4-standard deviations oversold and a fairly strong bounce is likely.

However, longer-term investors may want to use whatever bounce comes to rebalance energy weightings in portfolios as it is quite likely that the dynamics of the oil/energy market have now markedly changed going forward.  As I discussed recently in "No, It's Not Time To Buy Oil Stocks Yet," the longer-term investment opportunity in energy has occurred after the initial bounce.  To Wit:

"As you will notice, each time there is a sharp correction in the NYEI, the subsequent bounce has been an opportunity to sell positiions that are underperforming, experiencing credit related issues or were just poor investments to begin with. Strongly rising markets mask many investment errors made by investors that are quickly, and brutally, revealed during market declines. These bounces give investors opportunities to clear those mistakes.

 

The subsequent decline provided an ideal opportunity to reallocate portfolios to better quality and performing issues within the portfolio. The current sell-off is likely the first leg of a similar pattern that investors should use to clean up portfolios in energy related investments."

This weekend's reading list is a collection of articles discussing the good, the bad and the ugly of the dive in crude oil prices. It will likely be some time before we know how this particular story ends, but it is a story that is particularly important to Houstonians that have enjoyed oil-driven economic boom for the last five-years.

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1) 10 Reasons Why A Severe Drop In Oil Prices Is A Problem by Gail Tverberg via Our Finite World

• Low prices lead to oil being left in the ground
• Low prices negatively impact shale extraction and offshore drilling
• Shale operations have a huge impact on US Employment
• Low oil prices lead to debt defaults
• Low oil prices can lead to collapses of exporters
• Benefits to consumers likely smaller than expected
• Hope for exported oil and LNG likely to disappear
• Hoped for renewables lose luster with low oil prices
• Deflationary pressures
• Drop in oil prices likely reflective of world reaching debt expansion limit

Read Also: Oil & Banks – As Prices Fall Risks Rise by John Schoen via CNBC

 

2) Energy Bond Risk Soars To Record Highs via ZeroHedge

"The spread (or risk) of high-yield energy credits surged again today, breaking above 850bps for the first time… The overall high-yield credit market is being dragged wider by this contagion as hedgers try to contain the collapse that is possible. For now, the S&P 500 remains entirely ignorant of the fact that over a third of its CapEx was expected to come from this crushed sector."

 

Read Also: Why The Stock Market Is Detached From The Economy via Streettalklive

Read Also: Guess What Happened The Last Time Oil Crashed Like This by Michael Snyder via Conscious Life News

 

3) Why The Oil Price Decline Is Not A Bad Thing by David Rosenberg via The National Post

"Mr. Rosenberg said the stiff drop in oil prices this year has resulted in U.S. gas prices falling US26¢ to US$2.88 per gallon from US$3.14 a month ago. That, he said, is equivalent to a US$40-billion tax cut that will benefit various sectors including transportation, energy-dependent manufacturers and segments of the consumer discretionary space such as restaurants, electronics, and music and book stores."

Read Also: Why Bottom Falling Out Of Oil Isn't All That Bad by David Rosenberg via The National Post

 

4) Recession Is The New Stimulus by Jeffrey Snider via Alhambra Partners

"At this point the idea of 'decoupling' enters as if it were valid today in a way it was totally absent in 2008 (the last time “decoupling” was so prevalent). In other words, the global economy may be sinking but the US is supposed to be the bright shining light of contrary good fortune. Thus, less demand around the world is expunged from the domestic trend of rising production and scenarios of import price competition. Of course, I think that is nothing more than the same wishful thinking that drove the 2008 version, but also that it is plainly obvious that emerging market demand for energy is a full part of the lack of forward demand up the supply chain. China may be slowing, but it’s not because China is slowing on its own, rather the US is buying a lot less from China (and everywhere else).

 

GDP is a spreadsheet or regression with variables to be moved around and nothing more to 'economists.' How else can you arrive at the idea that rapidly gaining bearishness in markets with trillions and trillions on the line is now the go-to 'stimulus?' Maybe the global economy, including the US, will get so bad it will be positively booming."

Read Also: Oil Price Drops – Don't Panic, Really by Cyrus Sanati via Fortune

 

5) Steep Slide In Oil Prices Is Blessing For Most by James Stewart via The New York Times

"The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.

 

But if history is any guide, it’s hard to see falling oil prices as anything but good news for everyone whose fortunes aren’t tied to oil, which is to say, most of the world’s population."

Read Also: Plunging Oil Prices Will Starve The World Of Economic Fuel by Chris Martenson via MarketWatch

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Read This: Dollar Surge Endangers Global Debt Edifice Warns BIS by Ambrose Evans-Pritchard via The Telegraph

"The BIS has particular authority since its job is to track global lending. It was the only major body to warn of serious trouble before the Great Recession – and did so clearly, without the usual ifs and buts.

It now warns that the world is in many ways even more stretched today than it was in 2008, since emerging markets have been drawn into the global debt morass as well, and some have hit the limits of easy catch-up growth."

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"Let me tell you something that we Israelis have against Moses. He took us 40 years through the desert in order to bring us to the one spot in the Middle East that has no oil!" – Golda Meir

Have A Great Weekend

via Zero Hedge http://ift.tt/12XyiJq Tyler Durden