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Friday, April 21, 2017

Misconceptions​ of Normal


In the midst of a bursting bubble in 2008, the Federal Reserve feared deflation would spiral out of control.  The Fed sought to reinstate "normal" inflation via abnormal means and what more immediate and direct than goosing the cost of oil.  The chart below highlights the start of QE coincided with the bottom in oil, QE maintained the period of extremely high oil prices, and oil prices collapsed immediately upon the completion of the taper.
A close-up below of the exact period of QE plus a highlighted box on the extended period of $80+ oil once QE was fully in effect.  For $4.5 trillion in new dollars injected into the economy, the Fed had to get something!?!  And what they got were asset bubbles and expensive oil.
In fact, average prices for oil pre QE, during QE, and post QE are pretty telling.
  • Pre QE Era...Jan '00-->Nov. '08 = $50 average
  • QE Era...Dec '08-->Nov '14 = $87 average
    • Oct '10-->Nov '14 = $95 average & not a single month under $80!?!
  • Post QE Era...Dec '14-->Mar '17 = $47 average
But when the Fed distorts markets, strange things happen.  For instance, from 2000 'til November of 2008, US shale oil or "tight" oil production increased just a hundred thousand barrels (from 400k to 500k) despite consistently rising prices and demand.  Noteworthy from '05 to '08 was the banking spread (the grey shaded area in the chart below) was minimal or negative.

However, in 2009 with the combination of the Fed's ZIRP (Zero Interest Rate Policy), a fat spread (incenting dubious loan issuance), and consistently $80+ oil prices...an essentially old technology was born anew with nearly free financing and US tight production rose by over 4 million barrels (chart below).  The Fed's efforts to create inflation instead created over leveraged, over priced, oversupply and further deflationary declines.

But now the winds of change are blowing cold on US tight oil.  The Fed is raising rates, the spread is collapsing, the oil price is languishing in the mid range, and increased US production has the world oversupplied with oil.  The aberration that is US tight oil is not likely to thrive in these conditions...and more likely this is the epicenter of the next great American economic crisis.

Still, even more broadly, oil has me a bit vexed.  Seemingly, US oil production has zero to do with price or consumption...in the chart below, two periods are circled where price soars, demand rises, and yet for long periods US oil production continually falls...


1973-->1981
  • +965% Price increase
  • -6% US Production decrease
  • US Consumption rises and then suddenly.declines
1998-->2008
  • +700% Price increase
  • -20% US Production decrease
  • US Consumption rises and then suddenly declines
Perhaps it was coal or natural gas production that rose instead?  The chart below plainly shows US fossil fuels production was flat to declining for 39 years from 1970 until 2009 when ZIRP and fat spreads set natural gas and tight oil free.  I'm truly very curious what exactly President Nixon agreed to when he concluded the period of Bretton Woods and initiated the Petro Dollar with OPEC?  The metamorphosis of US energy production pre and post Nixon's agreements is still shocking.
And below, just for giggles, the changing US consumption of different sources of energy since 1950.The chart below shows the breakdown of US energy consumption growth since 1950.
Lastly, why growth is breaking down is so simple.  The chart below shows the stalling employment among the US 25-54yr/old population, the concurrent stall in total energy consumption, and the Fed's role to reduce the cost of debt to incentivize it's utilization at every level (private and public).
Below, a breakdown of the above plus GDP.
Below, a focus on debt vs. GDP over the different periods.
Breakdown of core employment growth by period (below).
Breakdown of energy consumption growth by period.  Energy consumption growth has ceased following the absence of core population and core employment growth (chart below, units are quadrillion BTU's).