Submitted by PM Fund Manager Dave Kranzler, Investment Research Dynamics:
Bloomberg was out today heralding the “new bull market” in oil. I herald it as Bloomberg’s new bullmarket in bullshit. The price of oil is determined in the short run by a lot of factors besides the law of economics. The spike up today in the price oil was most likely technically driven by hedge funds covering large short positions put on over the past couple of weeks. The short-cover trigger was likely a big bid put into the market by the Too Big To Fail banks backed by the Fed.
Make no mistake about it, the Federal Reserve in conjunction with the big banks have “blood money” motivation to try and keep the price of oil propped up. The big banks are exposed both on and off balance sheet to the price of oil. Many of the big banks are heavily exposed on-balance sheet to the collapsing oil shale/fracking industry in the form of hundreds of millions of asset-based revolvers. These are shorter term funding facilities, the size of which is determined by the value of the estimated shale reserves of the borrower. However, many of these revolvers were drawn down when the price of oil was much higher. It is highly probable that the big banks like JP Morgan are sitting on drawn revolver facilities that are worth dimes on the dollar.
Preventing this default has become a growing problem and is the primary task facing central banks. Household, corporate, government and financial sectors are all exposed to debt default, ensuring political and business considerations will allow no alternative outcome. – Alasdair Macleod (link below)
A former colleague of mine who trades distressed energy debt told me he thought the big banks had these debt facilities marked at par (100 cents on the dollar). When I asked him if if any of was trading yet in the secondary market he responded: “no, but all hell will break loose when it does.”
This debt will blow big holes in bank balance sheets. We only can assess the on-balance-sheet damage. There is no doubt 10x that amount of exposure in the form of OTC derivatives. The lower the price of oil goes, the bigger will be the hole that is blown. This is specifically why the Fed/TBTF banks are working to keep the price of oil aloft and why they are feeding pump and dump outlets like Bloomberg the information that a new bull market in oil has started.
Equity markets are telling us that the debt crisis is now upon us again. The detailed course that events will take from here cannot be predicted, but we can be certain that over the coming months governments will be ready to move heaven and earth to prevent a deepening crisis, by any means at their disposal. – Alasdair Macleod
The start of an economic crash of unprecedented magnitude began in 2008. The true severity of this crash was delayed by mark to market accounting, increased debt issuance and money printing. Many trillions of it. But ultimately history tells us that the no amount of artificial manipulation and attempted market control can evade the laws of economics. The collapsing price of oil is a rock-solid indication that economies globally, including and especially the U.S. economy, are in a state of collapse.
Alasdair Macleod has written a must-read commentary/analysis of what is now unfolding and why. You can read his entire article here: Economics Of A Crash
The Shadow Of Truth will be hosting Alasdair this Thursday. We will discussing this article as well as his take on what is now unfolding in the precious metals markets and China.