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The Power of the Wave Principle

The Boy In The Bubble

Stock-Markets / Financial Markets 2014 Apr 30, 2014 - 06:28 PM GMT

By: Raul_I_Meijer


That’s how I feel these days, or I should say these years. Since the name of this site comes from Paul Simon’s song by that title, it comes easily. Funny enough, I watched one of the Making of Graceland docs on Sunday night, and then on Monday morning read that the grand small 70-year old songwriter has been arrested because his wife’s mother had called 911 for a domestic disturbance situation. Given that Edie Brickell is about a foot taller than Simon, that made me smile. All the more so because in the documentary he’s talking about how he’s not good at writing angry songs, and that’s why Graceland came out the way it did, instead of being filled with loud protests against the injustices of South Africa. But, he said, outside of my songs, I’m very capable of expressing my anger, and I do get angry. Got ya, Paul.

Personally, I perhaps find it harder to not get angry all the time, and try to channel it into expressing amazement at what I see around me in this bubble I find myself in. For instance, I’ve seen more than one person claim this week alone that London real estate is not in a bubble – because there’s just so much demand -. And then I read that the average price of a 3-bedroom house in London’s plushest neighborhoods has gone up in “value” by $8000 per week, $1150 per day, over the past year, which represents a 20% rise overall. But I’m supposed to believe that that’s not a bubble. That all those buyers who owe their fortunes to Russia’s energy bubble and China’s $14 trillion stimulus bubble somehow represent the new normal. Let’s see what lifelong Londoners have to say about that who are getting pushed out ever further from the city center.

And in the US, to my utter bewilderment, there’s a second Enron, 12 years after the demise of the first one. the ghost of Kenny-Boy haunts the hallways of Wall Street. I’d say there were quite a few faces outside of Kenny Lay and Jeffrey Skilling, like amongst regulators, who should have been looked at at the end of 2001. But to let it happen again?! TXU slash Energy Future Holdings goes broke with a $40 billion debt. And Bernie Madoff is still in jail?! It’s not always easy to define what exactly is wrong with America, but whatever it is, it’s huge. The largest leveraged buy-out in history gambled on gas prices, and they lost. Investors thought they’d make a killing and got killed. Check your pension fund, I’d say. If only because Energy Future CEO John Young had this comment: “We are pleased to have the support of our key financial stakeholders for a consensual restructuring .. [..] We fully expect to continue normal business operations during the reorganization.” These guys lost $40 billion at the crap table, and they’re allowed to restructure, stiff junior investors, and get more loans? Where’s this going?

In the energy corner, there’s shale. Automatic Earth readers have known for a long time what shale is really about: land speculation. But how many other people realize that? The entire industry runs on junk debt, and you know what the collateral is? Land. Which is supposed to deliver enormous profits through the resources underneath it. But never quite does. I’ve asked it before: why do you think Shell and Exxon quit shale to the extent that they did, two companies who would kill their CEO’s grandma’s for some proven reserves? Bloomberg spells it out neatly:

Shale Drillers Feast on Junk Debt to Stay on Treadmill (Bloomberg)

The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays.

That’s what keeps the shale revolution going even as companies spend money faster than they make it. “There’s a lot of Kool-Aid that’s being drunk now by investors,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Peritus Asset Management.

“People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.” Rice Energy was able to borrow so easily because of the quality of its assets, which are in some of the best areas of the Marcellus, a shale formation beneath western Pennsylvania and West Virginia, and the company’s drilling success there, said Gray Lisenby, Rice’s chief financial officer. [..]

“Who can, or will want to, fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss?” Ivan Sandrea, a research associate at the Oxford Institute for Energy Studies in England, wrote in a report last month. “The benevolence of the U.S. capital markets cannot last forever.” The spending never stops, said Virendra Chauhan, an oil analyst with Energy Aspects in London. Since output from shale wells drops sharply in the first year, producers have to keep drilling more and more wells to maintain production. That means selling off assets and borrowing more money. “The whole boom in shale is really a treadmill of capital spending and debt,” Chauhan said.

“It’s a perfect set-up for investors to lose a lot of money,” Gramatovich said. “The model is unsustainable.”

Not a bubble? I’m not a vindictive person, but sometimes I think people deserve what they get. Serves them right for not reading The Automatic Earth. Shell has written off billions in its investments in shale, this morning it announced a drop in net profit of -45%, and you still think Shell wouldn’t be all over this if it could find a way to make a buck? At least you must admit this article makes the claims of exporting US oil and gas look even funnier than they already did. And like with Enron and TXU, you should wonder who the people in government are that allow for this kind of trickery to happen.

And then, timely ahead of Fed announcements later today, David Stockman tells it like it is:

The Fed Is Fueling The Century’s ‘Greatest Bubble’

The Fed is “a posse of academic zealots and unreconstructed Keynesians who think debt is the magic elixir, and they won’t stop printing money and putting their foot on the floorboard until they really blow something up …” At this point, his biggest concern is the impact that the Fed’s stimulative policies have had on equities. “I think the Fed is now inflating the greatest and third bubble yet of this century [..] The Russell 2000, even though it’s come off a little bit, is still trading at 80 time trailing earnings. That’s crazy, and you can say that about many other sectors of the market.” “What we need to do is get the Fed out of there, free interest rates, let the money market find the natural balance and purge some of this enormous speculation …”

There are people who know a bubble when they see one. But not everyone does, and it’s not in everyone’s interest either. Politicians can be made to look good inside a bubble, and businessmen can make a lot of money off the public purse. And you yourself get to feel for a fleeting moment in time as if you’re richer than you actually are. Because make no mistake about it, when this bubble bursts, it’s going to hurt. A lot worse than the last one. A comment in the Guardian on the “benefits” of austerity said: “… how does the logic of austerity sound in Britain? The country is richer, but its people are poorer. This now counts as a recovery.” That is a nice way to put it. Except that the country, too, will be poorer after the bubble pops, and a lot. And that will, of course, make the people poorer too. A lot.

There are lots of you, probably most, who like to live in a bubble. As long as you don’t feel forced to see it for what it is. It’s like the Truman Show. Exactly like that. But I know full well I live in a bubble. And I want to get out. It’s suffocating. Because I know what’s going to happen once it bursts, and it will, and the longer that takes, the worse the outcome will be. For the man in the street. Who I care more for than for those who seek only money or power. That, after all, is why there’s an Automatic Earth. Unlike the original boy in the bubble, you and I are not going to drop dead as soon as the bubble bursts. But just like him, the bubble keeps us from experiencing real human contact. That’s a huge price to pay. It’s not all that great to be a boy in a bubble. I should know.

By Raul Ilargi Meijer
Website: (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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