As the Fed’s third and last bubble of this century heads for its splatter spot, the stench of desperate crony capitalism fills the air. You can count hedge fund mogul and Billary Buddy, Marc Lasry, among the upchucking financiers.
A few months back I heard him say on bubble vision that energy debt was a “once in a lifetime opportunity”. My thought was good luck with that, but even better luck to your investors—–who will need to get out of Dodge fast.
The truth is, Lasry had it upsidedown. Energy prices over the last 15 years were carried skyward by a once in a lifetime central bank driven credit explosion. The latter fueled a surge of phony demand and a tidal wave of malinvestment——not only in oil and gas, but practically everything else in the material and manufacturing economy of the world.
The reason that 2016 will prove to be a great historical inflection point is that the central banks of the world have finally run out of dry powder. After a 20 year spree in which their balance sheets exploded by nearly 11X—–from $2 trillion to $21 trillion—-they are being forced to shutdown their printing presses.
China has been obliged to stop because it has been slammed with a $1 trillion capital flight in the last year, and it’s accelerating. The BOJ and the ECB have already shot their wad and it’s done no good at all. The Fed spent 84 months dithering on the zero bound and now it has no dry powder left as the US economy slides into recession.
Accordingly, the great global credit bubble has finally run out of new central bank fuel. It has now surely reached its apogee at about $225 trillion compared to only $40 trillion back in 1994 when oil prices were still well under $20 per barrel. And soon the world’s mountain of debt will be falling in upon itself—–starting with the cratering Red Ponzi of China.
Needless to say, the latter amounts to a sword of Damocles hanging over the world’s massively deformed and dangerously unbalanced energy markets. To wit, almost all of the increase in global oil demand since the 2008 crisis has been in China and its caravan of EM suppliers and fellow travelers.
Total global demand in 2015, in fact, averaged about 92.6 mb/d per day (liquids basis)—–up nearly 7.0 mb/d since 2008. But 4.0 mb/d of that growth was attributable to China and another 6.0 mb/d to Brazil, Korea, the petro-states and the balance of the EM economies. By contrast, oil demand in the US, Western Europe and Japan is actually down by about 3.0 mb/d since the 2008 peak, as shown below:
Now here’s the thing. While the red line above representing the Red Ponzi and its supply chain looks like it’s still slightly rising, it’s actually in the process of heading sharply southward. That means that in the period ahead, demand will be falling all across the planet on a sustained basis for the first time in modern history.
Moreover, that is not a forecast——it’s already happening. China’s apparent growth of 500k b/d last year was entirely due to filling its strategic reserve. But it has now run out of space—- at the very same time that its oil-using industrial economy is falling out of bed.
In fact, rail freight volume last year plunged by 10%, meaning that even China’s working commercial petroleum stocks are overflowing. The same slide in demand is obviously occurring in Brazil and throughout the EM.
Accordingly, the current 1.5 mb/d per day global surplus is just a warm-up. The global surplus is swelling toward 2-3 mb/d or even more. And prices are heading back into the $20s——a zone which was actually penetrated today for the first time since December 2003.
None of this is a mystery—–except to Wall Street gunslingers like Lasry who have become billionaires suckling on the madness of the world’s central banks. Still, last Friday when I accidentally turned on the sound during the CNBC halftime cattle call, I couldn’t believe my ears. Lasry was back saying—–
“It is now just a question of when the energy turnaround takes place in the next 3-months, 6-months or a year…….crude oil is going to be at $70 to $90 two years from now….. debt purchased at 60 cents today will be worth par, yielding 30 percent returns.”
And why was he so confident? Well, he seemed to think that the US economy is in the pink of health!
“I don’t think it’s a time to panic, I think it’s actually a time where you’ve got opportunities out there. Invest in solid companies and you’ll end up doing pretty well……I.don’t think we’re going into a recession, I think it’s whether we’re growing at 1 or 2 percent,” he said. “So the fact that you’ve got lower GDP, that’s fine, but at the end of the day the U.S. economy is doing fine……you saw the jobs report”.
Well, yes we did, and it was the weakest December NSA report this late in the business cycle in modern history, as we pointed out in our weekend analysis (Newsflash From The December ‘Jobs’ Report—–The US Economy Is Dead In the Water”).
But as it turns out Lasry was not playing at macro-economist after all. As we learned from Reuters last night, he was desperately shucking and jiving, trying to hide the fact that one of his major funds is suffering large losses, huge redemptions and has stopped reporting its daily results:
A junk bond fund run by billionaire Marc Lasry’s Avenue Capital Management, which has experienced heavy investment losses and investor withdrawals, has stopped voluntarily reporting daily asset figures to the mutual fund industry’s top two tracking firms….
Research chiefs for Morningstar and Lipper said on Monday they had not received daily asset under management figures from the Avenue Credit Strategies Fund since about mid-December……The Avenue Credit Strategies Fund has lost about 40 percent of its $1.2 billion in assets since the end of October. The fund currently has about $650 million to $700 million in assets……
The Avenue Capital fund’s total return of minus 13.35 percent in 2015 was worse than 98 percent of high-yield peers, according to Morningstar data. So far in 2016, the fund’s total return is minus 1.49 percent.
In short, what was a $2 billion fund a year ago, which bet big on busted energy debt, is now itself circling the drain.
But you would never know it from bubble vision. In a remarkably fast turn around, CNBC’s noontime host, Scott Wapner, who is apparently on the job 24/7, issued a post refuting the Reuters story hardly 30 minutes after it appeared at 11:25 PM.
A report that raises questions about a junk bond fund run by Avenue Capital Group is “misleading,” Avenue boss Marc Lasry has told CNBC….The fund is not required to report such data (but)……Beginning in February, Avenue will be reporting to these data services our AUM on a monthly, rather than daily, basis, similar to the practice of many funds and fund companies.
Remarkable, but revealing. Wapner has never posted at midnight before—–so the level of desperation at Avenue Capital Group must be at DEFCON 1 levels.
And well it should be. The US oil patch is heading for a debt conflagration like never before with more than one-third of industry facing bankruptcy, according to a recent Wall Street Journal survey.
Crude-oil prices plunged more than 5% on Monday to trade near $30 a barrel, making the specter of bankruptcy ever more likely for a significant chunk of the U.S. oil industry.
Three major investment banks— Morgan Stanley, Goldman Sachs Group Inc. andCitigroup Inc.—now expect the price of oil to crash through the $30 threshold and into $20 territory in short order as a result of China’s slowdown, the U.S. dollar’s appreciation and the fact that drillers from Houston to Riyadh won’t quit pumping despite the oil glut.
As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research…..
More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection so far during this downturn, according to law firm Haynes & Boone.
Morgan Stanley issued a report this week describing an environment “worse than 1986” for energy prices and producers, referring to the last big oil bust that lasted for years. The current downturn is now deeper and longer than each of the five oil price crashes since 1970, said Martijn Rats, an analyst at the bank.
Needless to say, the reason that this could be the worst oil industry crash since 1970 is that the bubble which preceded had no precedent, either. The central bank driven scramble for yield resulted in what amounted to an insane inflow of debt into an industry that is inherently risky and subject to massive cyclical swings in commodity prices.
Indeed, the juxtaposition of the 2007-2009 oil price explosion/implosion cycle with the staggering post-recession increase in the North American E&P industry debt says it all. After a $100/barrel round trip on the commodity price, no sane market would pony up $150 billion in new debt the morning after.
Indeed, no honest and properly priced debt market would have ever advanced that much debt to shale and tar sands producers even if the 2007-2008 oil price bubble had not happened. In a world where the marginal barrel from Saudi Arabia has a lifting cost of less than $15 per barrel, mega debt on the highest end of the supply curve is just plain loony.
So this time is different. We are not talking about 60 cent energy debt springing back to par.
In fact, the more likely course is exactly what is transpiring in the string of US coal company bankruptcies now working through the system. In the case of the latest to file——Arch Coal——it appears that bondholders will get a penny on the dollar and the banks will end up with equity of completely dubious value——given the massive excess capacity that will remain in the domestic and global coal industry after the reorganization.
The same dynamic is at work in the oil patch. Twenty year of rampant global credit growth and 7-years of massive financial repression by the central banks after the 2008 crisis have created a wholly new condition.
Namely, there is so much excess and uneconomic capacity that it will take years of operation at variable cost to absorb it or cause it to be eventually abandoned. That means this time there will be no V-shaped recovery of asset values. They are down for the count.
As the WSJ article further explained:
Energy companies that took on huge debt loads to finance their slice of the U.S. drilling boom have no choice but to keep pumping to generate cash for interest payments. As they do, they are drilling themselves into a deeper hole. Companies including Sandridge Energy Inc., Energy XXI Ltd. and Halcón Resources Corp. all paid more than 40% of third-quarter revenue toward interest payments on their loans, according to S&P Capital IQ. Representatives for Sandridge and Halcón didn’t respond to requests for comment.
There’s no reason to be anybody’s savior,” said Chad Mabry, a senior energy analyst atFBR & Co. “If you can just get the assets out of bankruptcy, then you don’t have to save anyone.”
At the end of the day, what is coming this time is real bankruptcies, not the kind of faux workouts that allowed so-called “distressed” investors to feed on the truncated bottoms of 1990-1991, 2000-2002, and 2008-2009, and then see asset values coming screaming back after the Fed launched another round of bubble finance.
Back in the early days of bubble finance after the 1991 recession I recall marveling about the killings that were being made on Wall Street by investors buying up the busted savings and loan paper held by the Resolution Trust Corporation (RTC). It seemed insensible that what had been a $200 billion bailout disaster for the taxpayers was being transformed within 2-4 years into massive investor capital gains.
In hindsight, what happened was that the Fed pulled out the stops, slashed interest rates from 9% to 3% and set in motion a pattern that would be repeated again in 2001 and 2009. The real losses that were embedded in the distressed junk bonds and loans and other sketchy paper at the bottom of each bubble cycle were rapidly washed away by the magic of the printing press in the Eccles Building.
Needless to say, the above chart says it all. Avenue Capital Group and its forerunners opened for business in 1989, and were on hand to scoop up the busted paper three times during the next 25 years, and then wait for the Fed and other central banks to reflate the financial asset markets.
Looking at the steepness of the yield curve drop after the 2009 it is possible to understand how paper bought on leverage at a 25% yield was turned into gold in the final years of madness under ZIRP and QE.
It is also possible to understand how “distressed” investing became a business in the world of central bank driven bubble finance, even if such a thing would never happen on an honest free market. The massive issuance of debt that proceeded each bust simply would not happen in debt markets funded by real savers, not central bank enabled fiat credit.
It also possible to understand how Lasry made $280 million in 2013 harvesting gains along the sharp slope of plunging yields and inflating paper.
But that was the last rodeo. It appears that Herb Kohl unloaded the Milwaukee Bucks just in the nick of time.