Insanity? Markets continue disconnect from economy and society

It's hard to ignore the protests on the streets of the world's cities of late. Those protests are coming from a populace who knows that the system they live under long ago stopped benefiting them. While the focus has been the senseless killing by police of an African-American man—all of which was caught on video—there are many other grievances: legalized financial theft by the one percent from the rest of us comes to mind, something that has resulted in growing and egregious inequality across the world.

It's also hard to overestimate the hardship visited on the world's people as many have been deprived of income and daily life by up to three months of pandemic-inspired stay-at-home orders and retail shutdowns. As I mentioned in my previous piece, the U.S. Federal Reserve Bank of Atlanta does a frequently updated estimate of U.S. GDP which as of this writing is minus 53.8 percent for the second quarter. (That's annualized and seasonally adjusted.) The estimate for the current quarter started at minus 12.1 percent and has been dropping like a stone with each new piece of information. For comparison, U.S. GDP during the 2008-2009 financial crises shrank by only 4.2 percent.

And yet, the world's stock markets are behaving as if the protests and the deprivation are inconsequential. After crashing in March in the wake of the spread of the coronavirus pandemic, major stock market indices are at or near all-time highs. For example, the S&P 500 Index was last around its Friday closing price on February 24, before the coronavirus pandemic market panic. How can this be explained?

Extraordinary popular delusions: Endless bull markets and mining on the moon

Charles Mackay was a 19th century Scottish poet, journalist and author who is best known these days for his book Extraordinary Popular Delusions and the Madness of Crowds. He leads off with three of the most famous financial bubbles in history: the Mississippi Scheme, the South-Sea Bubble and Tulipomania. He also writes of fortune-telling, witches and the Crusades.

Fortune-telling remains a mainstay among the financial elite and the lowliest retail investor on the planet alike. The U.S. Federal Reserve Bank has a sort of running fortune-telling tool called GDPNow that takes up-to-date indicators and plugs them into its formula for projecting the current direction of U.S. GDP. GDPNow is revised every few days as new values for its many components become available.

The latest reading as of May 29 is minus 51.2 percent. That's an annualized number that is seasonally adjusted. It's a number that suggests that economic activity may have fallen at least as much since January as it did in the first four years of the Great Depression (1929 to 1933). At the bottom of the depression in 1933 the U.S. economy had contracted by about 30 percent. Unemployment in the United States reached 25 percent. The Dow Jones Industrial average had lost almost 90 percent of its value.

A stealth peak in world oil production?

We who have been suggesting that a peak in world oil production was nigh almost from the beginning of this century looked like we might be right when oil prices reached their all-time high in 2008. But since then, we have taken it on the chin for more than a decade as the U.S. shale oil boom kept adding to world supplies—even as production in the rest of the world mostly stagnated or declined.

But then world oil production turned down—not when the recent coronavirus pandemic and associated economic shutdowns hit—but more than a year before while few people were noticing. Monthly fluctuations will make it difficult to pinpoint a peak until long after it occurs. But, let's note the difference between world output in November 2018 which was 84.5 million barrels per day (mbpd) versus December 2019 which was 83.2 mbpd when the world economy was supposedly still in high gear. (These numbers are for crude plus lease condensate which is the definition of oil on major oil exchanges.) Between these two dates monthly oil production was occasionally lower than December 2019, but never higher than November 2018.

Does this mean oil production has reached an all-time peak?

The world in straight lines: Why we are not ready for discontinuities

It is not unusual to hear someone make definitive statements about the distant future as if they were facts. How often have we heard something like the following: The world economy will double in size by 2050.

When people represent such "facts" in chart form, those facts become somehow more convincing. (You need to click on the charts below to see them clearly):

SOURCE: OECD

Taking a short break - no post this week

I'm taking a short break this week and expect to post again on Sunday, May 17.

Oil flows spell deep depression

Energy is not just one commodity among many in the economy; it is the commodity. Without energy, nothing gets done. And, oil is not just one form of energy in the energy commodity complex; it is the energy source upon which our modern way of life depends. In fact, it is the main energy source running through the arteries of the global economy.

Far from being a boon to the world, ultra-low oil prices signal that the global economy is flat on its back—even worse, flat on its back with two broken legs.

Petroleum geologist and consultant Art Berman recently detailed the problem in this piece. Berman is the man who accurately predicted—starting way back in 2008—the persistent losses that shale oil and gas would produce for the companies that extracted them. The shale industry continuously vilified Berman for his analysis over the next decade, even as the industry was in the process of blowing 80 percent of investors' capital as of last year. With the arrival of the coronavirus, the coup de grâce has just been delivered to a shale oil and gas industry that was already on its knees.

Perhaps the most important thing to understand about the current oil "glut" is that it is not merely the result of producing too much oil for an economy humming on all cylinders. It is primarily the product of a coronavirus-infested economy in which demand has dropped 20 percent in just a few weeks. As Berman points out, estimated U.S. oil consumption has returned to a level not seen since 1971.

Insuring against catastrophe: The coronavirus predicament

People insure themselves against many types of potential catastrophes: a house fire, a car accident, the untimely death of a spouse, a serious health problem. For other unexpected expenses, prudent people, as we say, save money "for a rainy day." For some reason people and governments have chosen not to insure themselves (individually or collectively) against two catastrophes that have been much in the news lately: pandemics and large investment losses.

There is a connection, of course, for the two are tightly coupled. Here are some of the similarities between the two:

1. Both occur at irregular and sometimes very long intervals.
2. Both require careful thought and regular financial outlays to hedge against.
3. Despite persistent warnings from experts, most people (and governments) did not act on such warnings.
4. Now that the worst has occurred, many investment advisors and governments say, "No one could have seen it coming"—even when such a statement can be proven immediately false with easily obtained video evidence!

Will we learn from our current experience?

The answer in some cases will certainly be no because the incentives in our system encourage those in high places to act imprudently. Executives of publicly traded companies have spent trillions of dollars buying back shares of their own companies in order to goose stock prices and make their stock options more valuable—without regard for the need for cash reserves to make it through a recession.

The coronavirus scoreboard: The illusion of understanding and control

Cable television news now frames its news anchors with constantly updated coronavirus statistics, usually the number of cases and the number of dead. There is a sense of urgency in those numbers as viewers watch them tick higher. But, by definition those numbers cannot move otherwise since they are totals of past events.

A more useful indicator would be current active cases. But, that would be hard to count since so many cases are mild or at least uncounted among those now ordered to stay home. And, there are not currently enough testing materials to do complete testing of the world's population. As it turns out, the number of people who have had the virus may be 50 to 80 times higher than what is currently being recorded. The best we can do for now is to track the number of new cases identified by tests not yet widely available in many areas and see if they decline.

More than anything public officials want to convey the impression of understanding what we face and having solutions to control the outbreak. What they have done successfully in some places through severe social distancing and stay-at-home orders is to reduce the velocity of the spread of the virus without any ability to reduce the number of people who will ultimately contract it. It is really only a matter of time before all those who remain susceptible will get infected unless they hide in total isolation away from humans for good or until an effective vaccine is available—which may be a long time and possibly never. See here and here.

The Saudi-Russian oil price war tag team: Are things what they seem?

To the casual observer Saudi Arabia and Russia, two of the top three producers of oil in the world, have been having a spat about what to do about low oil prices. (See here and here.) Each has accused the other of bad faith and counterproductive behavior. But is that merely what the two oil powers want you to believe?

We've been here before. Throughout most of 2016 Saudi Arabia and Russia put on a two-person show for the entire world, pretending time after time to move close to an agreement to lower production in order to prop up oil prices, only to back away or delay at the last minute. The two kept this up for most of 2016. They incited periodic spikes in the oil price without ever having to cut one barrel of production, spikes that kept prices higher for weeks until they drifted back down to levels that reflected reality.

But I believe the most important thing they were trying to achieve then was to create an atmosphere of continuing uncertainty. That uncertainty was supposed to scare investors and lenders away from U.S. shale oil producers who were still hurting from an oil price collapse that began at the end of 2014. Saudi Arabia and Russia wanted to prevent those producers from resurrecting U.S. production and undermining oil prices again. Simply stated, Saudi Arabia and Russia wanted the shale oil industry to go bust in a way that would prevent a recovery for many years.

Ben Bernanke: Contrary Indicator

On May 17, 2007 Ben Bernanke, then chairman of the U.S. Federal Reserve System, spoke at a conference sponsored by the bank's Chicago branch and told his audience the following:

[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

Just 18 months later the world economy was on its knees due to the implosion of the subprime housing market, an implosion that ended up spilling over into practically every other part of the world financial system.

Bernanke's confident speech preceded the highs in the Dow Jones Industrial Average by only a few months and a few hundred points before the index plunged by more than 50 percent. Investment types would style Bernanke's speech as a contrary indicator—an event, utterance or market statistic that suggests excessive optimism or pessimism in a manner that indicates an imminent and major reversal in the prevailing market trend.