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Kurt Cobb: Oil prices and the coming financial ‘Ice Age’

General Ideas

Albert Edwards turned bearish on stocks back in 1996—well, not exactly bearish, but cautious. He recommended to clients that they overweight long-term, high-quality bonds and therefore underweight stocks in their portfolios. It turns out that clients who followed his advice fared not quite as well as those 100 percent invested in stocks but also took far less risk. Edwards believes that events that are currently unfolding will actually vindicate his approach.

Although Edwards never mentions energy as central to his thinking, I believe that energy and oil, in particular, are related to his views. I’ll develop this later, but first more on Edwards.

Edwards is a long-time financial strategist for the French investment bank and financial services giant Société Générale. He has an investment thesis that arose from the experience of Japan in the 1980s. He calls it the “Ice Age” thesis. It amounts to this: Gigantic debts that built up during Japan’s boom in the 1980s led to exceptionally sluggish economic growth after the Japanese stock market bust and finally to deflation and ultra-low interest rates.

Edwards expected the same thing to happen to Europe and the United States for the same reason. He got some of what he expected after the market crash of 2008/2009: ultra-low interest rates and sluggish growth. What didn’t show up was deflation.

But Edwards kept expecting his Ice Age thesis to play out in a subsequent recession that he felt couldn’t be more than four or five years away. At regular intervals he gloomily predicted a stock market crash resulting from a deflationary shock. But the recession and crash kept getting postponed—until now, he thinks.

Edwards was one of the very few who correctly predicted the drop in bond yields this year and he believes the world is about to enter the long-awaited terminal phase of the “Ice Age” he outlined back in 1996. In this terminal phase, he expects U.S. interest rates to turn decidedly negative and U.S. stocks to decline by more than 80 percent—that is, unless the Federal Reserve decides to interrupt the decline by buying stocks directly to bolster the market or to hand out free money to the populace in a sort of quantitative-easing-for-all strategy.

Edwards writes: “The key for me is whether QE2 [that is, another round of forced credit and money infusions into the economy by central banks] can revive the economic cycle, not equity prices temporarily.” He believes QE2 cannot revive economic activity at this point. And, that implies a bust that will rival if not exceed the crash of 2008, he says—and a prolonged malaise of slow or no growth afterward as part of a financial hangover from bingeing on too much credit.

Edwards hints that “unprecedented monetary measures” might be taken to forestall outright deflation which, of course, implies entirely different investment advice than he is giving now.

So, how does all this relate to energy and, in particular, oil. When reading Edwards’ latest pronouncements, I couldn’t help thinking about Gail Tverberg’s almost parallel thesis that what will doom oil supplies is prices that are too low for producers to make a profit. That is just what has been happening this decade along with the slowly creeping financial Ice Age described by Edwards. Could the two be related?

Tverberg answers the question indirectly in a second piece entitled “Why stimulus can’t fix our energy problems.” For Tverberg affordability is the problem. Widening wealth inequality leads to stagnant and even lower incomes for a greater and greater number of people who are then unable to afford not only direct energy purchases as easily as they have in the past, but are also faced with affordability issues for practically everything else. That’s because energy is embedded as a cost of production, distribution and sale in everything we buy.

So, a sluggish economy—made sluggish by excessive debt (Edwards)—combined with widening wealth inequality (Tverberg)—leads to generally lower employment and depressed wages than otherwise would have been the case—which leads to prices that are too low for energy producers, in particular, oil producers to make a profits sufficient to replace oil reserves that have been depleted or, in the case of oil exporting nations, pay for social welfare costs. According to Tverberg, this inability to make much profit among oil producers—shale producers have had negative free cash flow for years—feeds back into the economy, especially in the United States where the previously broadly booming oil and gas industry has been a major source of employment and business activity. (The boom now seems confined to the Permian Basin in Texas.)

A low oil price also leads to lower investment and social welfare payments in major oil exporting nations which reduces employment and incomes below what they otherwise would have been. The overall sluggishness of the world economy (compared to previous expansions) reinforces the effect of low oil prices.

The sweet spot in the oil industry is a price which insures healthy profits for the industry (with which they can invest in new wells) and at the same time does not tip the world into recession because the price is unaffordable to consumers. There is a supposition in Tverberg’s work that these two price bands no longer overlap. Prices low enough for the world’s consumers to afford are too low for producers. Prices high enough for producers to make a decent profit are too high for consumers to afford over the long term.

Now, here’s how Tverberg’s thinking hooks up most directly with Edwards’. Tverberg writes: “It looks as though growing debt at ever-lower interest rates is becoming a less effective workaround for the economy’s real need, which is a need for a rapidly growing supply of under $40 per barrel oil and other low-priced energy products.” Edwards sees debt creation as becoming a less and less potent way to create economic growth in a debt-saturated economy. Tverberg goes to what she believes is the heart of the matter claiming that added debt cannot seem to provide oil and other energy sources at cheap enough prices for the economy to flourish. The financial Ice Age seems central to the views of both.

And, both Edwards’ and Tverberg’s outlook lead to the same result, a crash in the world economy that will be difficult to turn around. For Edwards there is the possibility that after a long retrenchment period, economic conditions could return to what passes for normal. For Tverberg, however, her thesis suggests a permanent alteration of conditions for modern societies in which energy insufficiency becomes a feature that limits and even stops economic growth.

If either one is correct, look for an economic tsunami in the not-to-distant future.

Resource Insights



65 Comments on "Kurt Cobb: Oil prices and the coming financial ‘Ice Age’"

  1. Cloggie on Tue, 10th Sep 2019 10:00 am 

    Sign of the times, creeping populist influence:

    https://www.independent.co.uk/news/uk/politics/brexit-news-latest-commissioner-for-protecting-our-european-way-of-life-ursula-von-der-leyen-a9098991.html

    “EU accused of adopting ‘fascist rhetoric’ with new Commissioner For Protecting Our European Way of Life to oversee immigration policy”

    Way to go, Ursula!

    “European Way of Life is not negotiable“.lol

    Looks like Anglos are the only ones who intend to wipe themselves out from the face of this earth. Uncle Schmull will be proud of you, lads! Come on empire dave, call me a natzi and racist one more time, while I call you an American.lol

  2. Cloggie on Tue, 10th Sep 2019 10:06 am 

    Ursula von der Leyen’s solid contribution to European civilization:

    https://images.app.goo.gl/RmPxFnQHeQeJ3n1s9

    She’s invested in the future of Europe.

  3. Davy Sock Puppet on Tue, 10th Sep 2019 10:15 am 

    Juan paultard

  4. Cloggie on Tue, 10th Sep 2019 10:23 am 

    “Actually Cloggie the British PEOPLE never voted to join the EU. All TREATIES were passed by Parliaments there was no EUSSR when the people voted to join a common market in 1975, certainly they were never told how far it was going to go.”

    That’s true. But again, nobody will stop you from leaving what has become a political project. If we remain divided in little national states, anybody can push us around, like happened in 1945. We Europeans are a little too good to be pushed around by Chinese, Americans, Soviets and similar inconveniences. Ir’s a pity the UK refuses to see itself as a “Great European Nation”, we would have made a great team, but we’ll be that even without you.

    https://en.wikipedia.org/wiki/History_of_European_Union–United_Kingdom_relations

    “The UK’s applications to join in 1963 and 1967 were vetoed by the President of France, Charles de Gaulle, who said that “a number of aspects of Britain’s economy, from working practices to agriculture” had “made Britain incompatible with Europe” and that Britain harboured a “deep-seated hostility” to any pan-European project.”

    De Gaulle was absolutely right. The British want Anglos to be the #1 club, like was the case between 1815-2016. I can understand that, looking back, but not without adding that the Brexit timing is an absolute blooper.

    The Anglo era is over. Reasons:

    – EU
    – Russia aspiring to become European
    – US white nationalism

    Together a winning a formula.

    But hey, no worries, you can “do” Anglo-Canada and New England for us, after “the Break”, giving some unexpected meaning to Brexit after all.

    Britain, Europe’s own lonely Japan (Cuba?).

  5. Duncan Idaho on Tue, 10th Sep 2019 10:57 am 

    Fukushima: Japan will have to dump radioactive water into Pacific, minister says
    https://www.theguardian.com/environment/2019/sep/10/fukushima-japan-will-have-to-dump-radioactive-water-into-pacific-minister-says

  6. Duncan Idaho on Tue, 10th Sep 2019 11:39 am 

    In other news, tRump fired John “the psychopath” Bolton.
    He made it a record 17 months.

  7. Duncan Idaho on Tue, 10th Sep 2019 11:52 am 

    Trump Fires Yosemite Sam
    https://www.moonofalabama.org/2019/09/trump-fires-yosemite-sam.html

  8. Cloggie on Tue, 10th Sep 2019 11:58 am 

    “Trump fires John Bolton”

    https://edition.cnn.com/2019/09/10/politics/trump-john-bolton-out/index.html

    Well done, Donnie!

    “Trump was irked by reports that he had faced internal pushback from Bolton over his decision to host leaders of the Taliban at Camp David, multiple people familiar with his frustration say.”

    “Bolton was initially brought into the administration last year to replace HR McMaster partly due to his hawkish position on Iran — supporting Trump’s exit from the Iran nuclear deal — but he soon began to clash with the President’s vision for diplomacy in North Korea and most recently on Afghanistan.”

    DJT is clearly NOT a neocon and a man of peace.

    Bolton, a major-league asshole, has bitten the dust.

  9. Duncan Idaho on Tue, 10th Sep 2019 3:29 pm 

    Bolton, a major-league asshole, has bitten the dust.
    Yep, but Trump has made an effort of appointing “major league assholes”, and has done a good job.
    Finding stupid assholes is one of his strong points.

  10. Davy (official) on Tue, 10th Sep 2019 3:32 pm 

    Me loves my socks and cocks (ebony & clover, over and over).

    Keepin it real for my peeps (socks) (i.e. Sum, fmr-paultard, ANAL REAPER, Church Lady, Truth Buster, Mitch, boney joe, among others)

  11. joe on Tue, 10th Sep 2019 4:18 pm 

    Getting rid of Bolton signals he no longer thinks he needs necon help like he did during the Russiagate conspiricy theory from the left. Bolton was a crazy m-fer and that his whole policy was to try to finish what Bush2/Cheney started. Trump was supposed to stop the wars, drain the swamp, get the jobs back and lock her up. Simple. Stick to the plan man.

  12. juan paultard madness on Tue, 10th Sep 2019 6:55 pm 

    fuck nut
    Nostradamus said I can’t wait until shale oil peaks.
    Davy (official) said Me loves my socks and cocks (ebony & clover, o..
    Davy Sock said juan paultard

  13. Joe MaMa on Tue, 10th Sep 2019 6:57 pm 

    ” Trump was supposed to stop the wars, drain the swamp, get the jobs back and lock her up. Simple. Stick to the plan man.”

    How’s Trump doing Joe Mama?

    1. Stop the wars. Nope BAU

    2. Drain the Swamp. Nope, his administration is the swamp, but worse.

    3. Get good paying manufacturing jobs back. Nope, the loss of manufacturing jobs under Trump is the worst ever.

    4. Lock her up. Nope.

    0 for 4. Great record wouldn’t you say.

  14. fuck nut juan paultard on Tue, 10th Sep 2019 6:57 pm 

    Joe MaMa on Tue, 10th Sep 2019 6:57 pm

  15. Davy Sock Puppet on Tue, 10th Sep 2019 7:01 pm 

    fuck nut

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