President Trump: The NEW one and only politics thread

What you posted about Russia is exactly what is happening. You are watching Russia try to tank the US economy right now. Really the wests' economies, because Europe and Japan are swimming under a mountain of debt, too.

Over the last 10 years, US shale oil producers have driven down the price of oil by producing a ton. But they are high cost producers. What has made them possible is a distorted interest rate environment. The high yield debt market has allowed them to borrow way cheaper than the risk inherent in their operations would have forced them to borrow at in a free market. Thank the Fed. So they have borowed heavily with little by way of lending standards, and they scaled up big and drove down the price of oil with all of their production. This hurts Russia, because its economy is heavily dependent on the price of oil -- the higher the better.

Apparently Russia sees now as the time to get rid of some of that competition. They could have done it at any time, so there has to be a strategic purpose. I don't know how long Russia can, or is willing to, suffer with a $20 or $30 a barrel oil price, which will hurt them. But they know that will bankrupt those US oil producers, which are sitting with a huge amount of debt that they can not service if oil costs that little, even with the ridiculously low rates (even on junk debt) that the Fed is responsible for. The bonus, perhaps, for Putin, is that that is just a pin on all of the mispriced debt out there because of the mess the various central banks have made. The high yield market has teetered several times over the last number of years, only for central banks to come in each time and prop up the house of cards by injecting a ton of liquidity using their various "money printing" schemes. When the mountain of debt they are responsible for starts to become a problem, rather than allowing a deleveraging, which is going to be very painful. ... they prop it up by enabling even more debt. That makes the eventual deleveraging worse. Nobody ever seems to care that that is what has been going on.

If it unravels now, you have 10 years+ more of imbalances, and trillions upon trillions of mispriced debt that has been created since 2008, when a more contained deleveraging could and should have happened. But they never allowed it, and just made it worse. It's not just some shale oil producers going bankrupt. The entire junk debt market will be in distress, and you will find out where there are situations like in 2006, 2007, 2008. They exist. Trust me. Ghost companies that have been living off cheap debt.The number of leveraged loans is mind boggling and a lot of them were written with few or no covenants. It's not a problem. ... until it is a problem.

Everyone will focus on the US equities today, because, "My 401(K)!" And US stock futures have already traded limit down (there is a circuit breaker at a 5 percent drop overnight that stops the bleeding) as I type this. But watch the junk bond market. It's the key to everything right now. Stocks are a small symptom of what I have been talking about, they are not the cause.

 

Occidental Petroleum bought Anadarko Petroleum LESS THAN A YEAR AGO for $57 billion. It was largely debt financed. That deal does not happen without the Federal Reserve having destroyed our debt markets and making it impossible for any lender to calibrate risk anymore.

Today after the stock market opens, Occidental Petroleum's entire market cap (including Anadarko) will be somewhere around $15 billion with the stock price drop. The debt they have taken on --close to $50 billion -- is still sitting on their balance sheet. It's a company that is in a lot of trouble now. A lot of people are going to lose their jobs as this all plays out. It's not just that one company. And it really sucks.

Even if you want to make the argument that the phony booms are worth the ensuing crises they necessitate, consider how much worse we all are over time because of it. Think about how inefficiently our actual resources get allocated. Instead of a market setting the hurdle rate for investment which is a natural regulator that funnels capital to the most economically productive ideas, it makes it so that the market can't calibrate risk, and it pulls growth from the future and spreads it around in really inefficient ways. Even bad investments look good in the distorted environment.

Everyone always focuses on what they can see. If you create a phony boom, they don't think about what is behind it, just how great things feel in the moment. When the phoniness leads to a debt crisis, they want someone to step in and artificially manipulate things back to prosperity, rather than allowing a necessary deleveraging to happen.

But the biggest consequence of this is what you can't see. How much better would all of our standards of living be, how many innovations would capital have found that it hasn't because it is going to much more inefficient places, and how many sustainable jobs on the back of PRODUCTIVE economic activity that is fueled by actual supply and demand would we have if the cost of borrowing were actually set by a market. I can't believe this is such a novel idea anymore.

 

With the comment that I think Josh Brown is an idiot (but an occasionally entertaining one). ... I hadn't thought about that.

Tillerson definitely sold XOM fairly opportunistically, as it turns out (He would have been even better served selling a few years before, actually).

The price of the cap gains tax he saved was the stomach ulcer from what had to have been the worst year of his life as Secretary of State. I wonder if he he would say it was worth it.