This Is How the Coronavirus Will Destroy the Economy

Though the Federal Reserve moved over the weekend to slash rates and buy treasuries, markets around the world fell on Monday anyway. The coronavirus threatens to set off financial contagion in a world economy with very different vulnerabilities than on the eve of the global financial crisis, 12 years ago.

In key ways the world is now as or more deeply in debt as it was when the last big crisis hit. But the largest and most risky pools of debt have shifted — from households and banks in the United States, which were restrained by regulators after the crisis, to corporations all over the world.

As businesses deal with the prospect of a sudden stop in their cash flows, the most exposed are a relatively new generation of companies that already struggle to pay their loans. This class includes the zombies”— companies that earn too little even to make interest payments on their debt, and survive only by issuing new debt.

The dystopian reality of deserted airports, empty trains and thinly occupied restaurants is already badly hurting economic activity. The longer the pandemic lasts, the greater the risk that the sharp downturn morphs into a financial crisis with zombie companies starting a chain of defaults just like subprime mortgages did in 2008.

Over the last century, recessions have almost always been started by a sustained period of higher interest rates. Never a virus: The damage such contagions inflicted on the world economy typically lasted no more than three months. Now this once-in-a-century pandemic is hitting a world economy saddled with record levels of debt.

Central banks around the world are waking up to the prospect that the cash crunch can beget a financial crisis, as in 2008. That’s why the Federal Reserve took aggressive easing measures on Sunday that were straight out of the 2008 crisis playbook. While it is unclear whether the actions of the Fed will be enough to prevent the markets from panicking further, it’s worth asking: Why does the financial system feel so vulnerable again?

Around 1980, the world’s debts started rising fast as interest rates began falling and financial deregulation made it easier to lend. Debt tripled to a historic peak of more than three times the size of the global economy on the eve of 2008 crisis. Debt fell that year, but record low interest rates soon fueled a new run of borrowing.

The easy money policies pursued by the Federal Reserve, and matched by central banks around the world, were designed to keep economies growing and to stimulate recovery from the crisis. Instead, much of that money went into the financial economy, including stocks, bonds and cheap credit to unprofitable companies.

As the economic expansion continued, year after year, lenders grew increasingly lax, extending cheap loans to companies with questionable finances. Today the global debt burden is again at an all-time high.

The level of debt in America’s corporate sector amounts to 75 percent of the country’s gross domestic product, breaking the previous record set in 2008. Among large American companies, debt burdens are precariously high in the auto, hospitality and transportation sectors — industries taking a direct hit from the coronavirus.

Hidden within the $16 trillion corporate debt market are many potential troublemakers, including the zombies. They are the natural spawn of a long period of record low interest rates, which has sent investors on a restless hunt for debt products that offer higher reward, with higher risk. Zombies now account for 16 percent of all the publicly traded companies in the United States, and more than 10 percent in Europe, according to the Bank for International Settlements, the bank for central banks. A look at the data reveals that zombies are especially prevalent in commodity industries like mining, coal and oil, which may spell upheavals to come for the shale oil industry, now a critical driver of the American economy.

Zombies are not the only potential source of trouble. To avoid regulations imposed on public companies since 2008, many have gone private in deals that typically saddle the company with huge debts. The average American company owned by a private equity firm has debts equal to six times its annual earnings, a level twice what ratings agencies consider “junk.”

Signs of debt stress are now multiplying in industries impacted by the coronavirus, including transportation and leisure, auto and, perhaps worst of all, oil. Slammed on one side by fear that the coronavirus will collapse demand, and on the other by fears of a supply glut, oil prices have fallen to below $35 a barrel — far too low for many oil companies to meet their debt and interest payments.

Though investors always demand higher returns to buy bonds issued by financially shaky companies, the premium they demand on U.S. junk debt has nearly doubled since mid-February. By last week the premium they demand on the junk debt of oil companies was nearing levels seen in a recession.

Though the world has yet to see a virus-induced recession, this is now a rare pandemic. The direct effect on economic activity will be magnified not only by its impact on balky debtors, but also by the impact of failing companies on the bloated financial markets.

When markets fall, millions of investors feel less wealthy and cut back on spending. The economy slows. The bigger markets get, relative to the economy, the larger this negative “wealth effect.” And thanks again to seemingly endless promises of easy money, markets have never been bigger. Since 1980 the global financial markets (mainly stocks and bonds) have quadrupled to four times the size of the global economy, above the previous record highs set in 2008.

On Wall Street, bulls still hold out hope that the worst can pass quickly and point to the encouraging developments in China. The first cases were reported there on Dec. 31, and the rate of growth in new cases peaked on Feb. 13, just seven weeks later. After early losses, China’s stock market bounced back and the economy seemed to do the same. But the latest data, released today on retail sales and fixed investment, suggest the Chinese economy is set to contract this quarter.

While China is no longer center stage, as the virus spreads worldwide there are renewed fears that the crisis could circle back to its shores by hurting demand for exports. Over the last decade China’s corporate debt swelled fourfold to over $20 trillion — the biggest binge in the world. The International Monetary Fund estimates that one-tenth of this debt is in zombie firms, which rely on government-directed lending to stay alive.

In other parts of the world, including the United States, calls are growing for policymakers to offer similar state support to the fragile corporate sector. No matter what the policymakers do, the outcome is now up to the coronavirus, and how soon its spread starts to slow.

The longer the coronavirus continues to spread at its current pace, the more likely it is that zombies begin to die, further depressing the markets — and increasing the risk of wider financial contagion.

Ruchir Sharma is the chief global strategist at Morgan Stanley Investment Management, author of the forthcoming book, “The Ten Rules of Successful Nations,” and a contributing opinion writer. This essay reflects his opinions alone.

Living In The Greatest Financial Bubble Of All Time

The US continues to defy all rational valuation metrics as it continues to make new highs. I contend this is the result of the huge amount of liquidity being provided to the markets by the FED. This bubble now appears to be entering its blow off phase. As I have said before, just because a market is overvalued does not earn it cannot become more overvalued.
Nevertheless, at some point the music will stop and a massive decline in the stock market will occur.

Will the reduced economic activity caused by the coronavirus be the needle that pricks this bubble. So far the markets, with the exception of commodity markets, are shrugging off the news that China is basically on lockdown.

The German energy transition continues to fail as the country considers building more coal generation as energy rates soar and CO2 emission targets are not being met. A lesson for policy makers in the US to take into consideration.

 

00:00
hey guys John Paula me here actionable
00:03
intelligence
00:04
today is Sunday February 16 2020 this is
00:09
the weekly market update
00:11
so before right before I get into the
00:14
charts I just want to make some comments
00:16
on the continuing coronavirus situation
00:20
as it relates to what we’re doing when
00:23
it relates to in the markets and I’m a
00:28
little bit I don’t know
00:31
shocked not shocked but what’s the right
00:34
word confused we’re seeing all-time
00:38
highs last week and in many stocks in
00:42
the stock market and so you know it
00:49
makes you wonder what’s going on is the
00:51
market so efficient that its pricing and
00:54
the fact that this isn’t going to be a
00:56
big deal or is it more that I what I
01:00
think it is which is a liquidity bubble
01:03
plus all kinds of money coming into the
01:06
US for various reasons safe haven flows
01:10
if you will I think that’s probably an
01:14
explanation for why stocks are going up
01:15
there’s some stocks that are
01:17
inexplicably not going down which should
01:20
I’ll give some examples as we go and get
01:23
into the discussion what I want to say
01:25
though is is that I’m getting very very
01:27
concerned about the bubblicious
01:29
conditions we are at some of the highest
01:31
bubble levels that I’ve ever seen
01:34
now we’ve been talking about that for a
01:36
while and we’ve said that liquidity
01:39
flows matter you know the stock market
01:42
isn’t necessarily correlated with the
01:44
economy in the longer term it seems to
01:47
be but you know it’s liquidity matters
01:50
and with the QE for that that the Fed is
01:55
doing that the QE for non QE for
01:58
whatever they want to call it the repos
02:00
that’s high-powered money that’s t-bills
02:03
they’re buying this is the first time
02:04
they’ve done that in many years and that
02:06
money is going directly into the markets
02:09
couple that with the fact that you
02:11
already had dollar flows into the u.s.
02:13
prior to the coronavirus and now the
02:16
u.s. still being a safe haven that’s
02:19
where the money’s going so I would
02:22
caution you it what’s what’s fascinating
02:25
is is the the only thing that’s really
02:27
bad are commodities so the commodities
02:30
are showing us that you know demand is
02:34
obviously gonna have a knock-on effect
02:36
from this you know when you shut down
02:39
the Chinese economy basically you’re
02:41
gonna in some largest consumer of things
02:43
like oil largest importer of oil copper
02:46
aluminum cement things like this you’re
02:51
going to have a knock-on effect as China
02:54
basically everybody’s in quarantine and
02:56
Industry slows down we’ve also seen that
02:58
in the supply chains we’ve seen more
03:01
announcement this week we saw one
03:03
announcement where the company went back
03:06
to work and there was like a thousand or
03:09
2,000 employees and what the employees
03:11
had coronavirus now everybody’s
03:13
quarantined to the factory they can’t
03:14
even go home so I don’t know I’m back to
03:18
what I’ve said before I don’t really
03:20
know what’s going on here do you trust
03:23
the data in China no if you look at the
03:24
John Hopkins tracker coronavirus tracker
03:28
they take in they don’t just take in one
03:30
bit of information they gather
03:32
information from several sources it
03:33
seems like things may be starting to
03:36
peak in China if you believe the data
03:38
which I want I don’t believe the data I
03:41
would say though that I think the rest
03:46
of the world cases are still going up
03:48
slightly they’re still under a thousand
03:49
cases it’s like 750 outside of China
03:54
most of them concentrated in the areas
03:56
directly around China so there’s 15
04:00
cases in the US for example so we’re not
04:03
seeing this big epidemic now there are
04:06
many commentators or people that I’ve
04:08
listened to that said that the next wave
04:10
is coming and this thing is going to
04:11
explode outwards I don’t really know
04:13
what I’m I’m not a you know happened
04:15
epithelium ologist
04:17
I don’t have not an expert on academics
04:20
epidemics outside my circle of
04:22
confidence we still have to look at
04:23
those it’s affecting the markets that
04:25
were involved with which is resource
04:27
markets
04:27
for in a large part so I would be very
04:34
cautious if I was basically one of the
04:38
things I’m recommending is you know I
04:39
mean I think we’re going to see some
04:42
interest rate cuts from the Federal
04:43
Reserve as the economic numbers have to
04:47
be affected by this they have to be I
04:50
mean you’re just not going to have this
04:52
kind of slowdown in China and not have
04:54
it have a have an effect on the rest of
04:55
the world so I expect that that means
05:00
higher bond prices probably especially
05:02
in the Treasury market that’s a good
05:03
place play to put money in a short term
05:06
cash is always good I have a lot of cash
05:09
I like gold still Gold’s in a bull
05:12
market I think with the accelerating
05:14
monetary malfeasance that continues
05:16
around the world especially in the US
05:18
and I think you know what’s gonna happen
05:20
in China I think gold is poised to go a
05:23
lot higher especially with the debt
05:26
levels in the US we’re gonna be hitting
05:28
trillion dollar deficits I wrote an
05:30
article this week that kind of pointed
05:33
out the fact that I believe this is the
05:35
first year when the Social Security
05:37
trust fund now goes into the red and is
05:40
now going to become an on budget item so
05:42
you’re gonna have to pay out of the
05:46
federal budget there’s the two hundred
05:48
billion dollars that you don’t have in
05:50
the Social Security trust fund and I’ve
05:52
written articles about that people can
05:54
go my my site and look at that so there
05:57
is no lockbox there is no thing nothing
06:00
to dip into it’s just a bunch of IOU use
06:01
that now come do so things are not
06:05
getting better they’re getting worse but
06:08
yet the markets move higher and higher
06:10
and higher because it’s all about
06:11
liquidity so you know if you look at the
06:16
Venezuelan and Zimbabwe stock markets
06:19
when they went into hyperinflations
06:21
that’s not what I’m suggesting is gonna
06:22
happen in the US I’m not suggesting the
06:24
hyperinflation but if you look at their
06:25
stock markets they crashed upwards
06:27
there’s people piled in the stocks who
06:30
tried to hold some type of value so like
06:35
I said all these bubbles and we’ve
06:37
talked about bubbles even since I’ve had
06:38
this channel we’ve went through two
06:40
bubbles the Bitcoin
06:41
bubble that was one of the first videos
06:42
I did was about Bitcoin being a bubble
06:44
it was it crashed people a lot of people
06:47
lost a lot of money
06:48
same thing with cannabis stocks we
06:50
talked about that that’s now crashed
06:52
people have lost a lot of money so you
06:56
know we’ve seen bubbles before here’s a
07:02
chart shows various bubbles what happens
07:04
they crash they don’t usually come back
07:07
for a while you see the this particular
07:10
person chose excuse us what as
07:11
disruptors it’s just the post great
07:14
financial crisis that induced bubble but
07:17
this is the greatest one of all and it’s
07:19
now gonna go it’s I now believe it’s
07:21
accelerating too far it’s blow off top
07:22
and this is something we suggested in
07:24
previous videos what happened I’ve
07:25
talked about this I’ve got a Cassandra
07:29
but I suggested that even though the
07:33
stock market was overvalued and it’s
07:34
been overvalued from a long time it can
07:37
get way more it can get way overvalued
07:39
you can get much more overvalued and it
07:42
probably will another chart here you can
07:47
see going back to 1991 this is the
07:51
build-up to y2k that was going to be the
07:53
you know computers were gonna lock up
07:55
the world was gonna end the Greenspan
07:58
Fed printed a bunch of money it led to
08:01
the tech bubble it blew off but what
08:04
happened this is the Nasdaq he crashed
08:06
90% then you had your great financial
08:09
crisis in here we’ve had nothing but
08:11
money printing since and now QE 4 if you
08:14
will and we are now accelerating to what
08:16
I think is the blow-off top in this US
08:19
stock market so you need to be you need
08:24
to be concerned you need to be
08:26
understand what’s happening now I don’t
know what’s gonna prick the bubble some
I’m looking at my my indicators as I
look at the high-yield debt market which
I think will be the first thing that
rolls over and it’s not there’s no fever
there there’s no issues there right now
08:42
that can change you know as we start you
08:45
know one of the things like forecasts
08:47
are thought what could happen was that
08:50
if we did go into a recession there’s a
08:52
lot of zombie companies about 25 to 30
08:55
percent
08:55
the companies out there that have junk
08:57
debt are zombie companies and they
08:59
cannot afford to have rates go up rates
09:05
won’t go up unless we have some huge
09:07
breakout inflation so what could happen
09:10
though is that the economy slows
09:11
massively because of this China thing
09:13
cash flows can be constricted and that
09:16
could force companies into a situation
09:18
where they do not have sufficient cash
09:21
flow to service their debt and then you
09:23
begin a cascading flow of waterfall
09:27
effect if you will of debt explosions
09:32
and and you know reorganizations so I
09:35
think that’s a possibility but my
09:39
original thesis was that this thing was
09:41
gonna rip and roar we were gonna have an
09:43
energy was going to drag the inflation
09:45
rate up I we were on that track and then
09:48
the coronavirus had you remember we had
09:50
WT I was over it was sixty two dollars a
09:52
barrel at the beginning of January and I
09:56
was forecasting higher oil prices
09:58
because of the lack of investment and
10:00
the slowdown in shale and I thought that
10:02
that might be what kicks inflation into
10:05
gear and forces the Fed to raise rates
10:08
but now with the coronavirus and the
10:11
collapse and commodity prices that’s
10:14
happened that particular pin has been
10:17
put back into the into the drawer so
10:21
this is really amazing though because if
10:23
you look here at what’s happening in our
10:25
stock market I mean you could this just
10:27
correlates perfectly with what happened
10:29
with that we whole repo QE for non QE
10:33
for is what I call it so liquidity
10:36
really does drive these markets whether
10:39
people can then me you know you
10:40
supercharge this what the fund flows
10:42
into the US as because of it being a
10:45
safe haven or considered a safe haven or
10:47
the least dirty shirt in the HAMP or
10:50
however you want to characterize it but
10:52
this is what we are seen and this is not
10:55
healthy this is not going to end well
10:57
folks this is not good we’re gonna see
10:59
this blow off and then we’re gonna see
11:01
and I don’t know what’s gonna happen on
11:03
the downside so let’s go back talk about
11:07
some China stuff
11:08
for a while here her the resource
11:10
markets you know so the Baltic Dry Index
11:12
you know 415 it’s been a decline since
11:18
mid-2009 teen as the world economy was
11:20
slowing down but then we’ve got this you
11:23
know really what’s happened since the
11:25
beginning of the year and this
11:26
coronavirus took off and this things
11:28
crashed by you know three quarters or
11:33
two-thirds this is that lows we haven’t
11:36
seen in a decade so or almost of the
11:41
lows of 2016 so anyway this is not good
11:44
this is an indication that you know iron
11:47
or various ore concentrates they’re not
11:52
flowing you know because China is
11:55
basically shut down you know we’ve
11:57
already seen China declare a force
11:58
majeure on some energy deliveries like
12:00
LNG deliveries not good but what I’m
12:08
showing you this for is because I’m not
12:09
seeing the knock-on effect the market so
12:11
really don’t seem to be pricing any of
12:12
this in and it’s kind of it’s very weird
12:15
the signal is not good there’s China
12:19
travel collapse this was the passenger
12:21
transport volumes in China during the
12:23
Lunar New Year you see that we are
12:25
downed on rail roadway and air travel
12:30
anywhere from sixty to eighty percent
12:33
almost it’s a complete collapse the
12:35
whole country’s in lockdown basically
12:39
what I want to talk about why is this
12:41
relevant I just picked this one company
12:43
because I’ve heard other people talking
12:45
about it and kind of piqued my interest
12:46
this is wind resorts that’s a casino
12:48
operator they have properties in Las
12:52
Vegas but they also have two casinos I
12:54
believe in Macau which is a another
12:56
small island off the coast of China
12:59
where they allow gambling a lot of
13:01
Chinese well ninety five percent I’m
13:04
sure 99 percent of the traffic there is
13:06
is to these casinos is from China
13:13
mainland China what I find fascinating
13:16
here is is that the two casinos I look
13:19
at some of the financials real quickly
13:20
for Wynn Resorts
13:22
and the casinos the two casinos in Macau
13:29
are shut down now they’re still making
13:30
payroll basically they’re not to just
13:34
keep the casinos in the current state
13:37
they are paying payroll the 12,000
13:39
employees is about 2.5 million a day
13:41
they have no revenue coming in I believe
13:43
these two casinos if I read it correctly
13:45
contribute 300 million dollars of EBIT
13:48
da to the two Wynn Resorts bottom line
13:52
last year I think a billion dollars in
13:54
sales if I’m not mistaken regardless
13:58
when you shut down a large portion I
13:59
mean you had a bit of a drop off
14:00
obviously I mean actually if you look at
14:05
the beginning of 2020 when this virus
14:06
took off this thing made all new time
14:07
highs and then it it kind of did pull
14:09
back but not like you would think I mean
14:12
it pulled back about you know 20 percent
14:15
and now it’s rallying again why is this
14:17
thing rallying when there’s you know two
14:20
of their major properties and their
14:21
major revenue generators I mean are not
14:24
you know in business they’re just
14:27
sitting there we have no idea when
14:28
they’re gonna reopen so well I like I
14:31
said there’s two things going on here
14:33
either the market is efficient and its
14:35
pricing and the information and the
14:36
coronavirus is gonna blow over in the
14:38
next you know a few weeks or month or
14:41
two and then we’re gonna be back to
14:42
business as usual that’s one option of
14:45
another option as the market is just not
14:47
getting this I mean the same thing
14:48
you’re seeing like some of these cruise
14:49
ship companies these things should be
14:51
crashing who is taking a cruise with you
14:54
know to cruise ships go around like you
14:56
know Typhoid ships that can’t even get
14:58
into various ports I know I’m
15:00
overdramatizing that one of the ships
15:02
can’t but one of the one of the ships I
15:04
think that’s in Japan they’re finally
15:05
taking off British and American
15:07
passengers the governments of the UK and
15:10
the United States are dealing with this
15:12
but you know this news is not good this
15:16
thing’s supposed supposedly is so very
15:17
early and yet people are still taking
15:21
cruises and the you know it’s not really
15:24
being reflected you think any stock
15:25
prices only stock prices it’s reading
15:27
reflected as the resource markets you
15:30
know gold and copper down you know
15:33
anywhere from 15 or that gold but what
15:36
copper or down anywhere from 15 to 20
15:38
percent the stocks are down 30% which is
15:42
what you would expect get priced in
15:45
because of the you know like I showed
15:47
you earlier China’s basically shut down
15:48
so I don’t know this is not making a lot
15:51
of sense this thing is either gonna blow
15:53
over or it’s just going to we don’t know
15:55
what’s gonna happen and I just think
15:57
that some of the reactions in this
15:58
market are just ridiculous and they
16:01
don’t make any sense it’s just I think
16:04
like I said liquidity driven and no
16:08
fundamentals are even being considered
16:09
so you got to be careful out there guys
16:11
this is not this is really not textbook
16:15
what’s going on here well like I said
16:17
I’m still I still like gold I think you
16:20
can’t go wrong at gold sir we already
16:22
knows was in a bull market if we’re
16:24
gonna see increased money or increased
16:27
currency units being put into
16:29
circulation then I think that that’s
16:33
going to manifest itself in a higher
16:34
gold price at some point continued
16:37
higher gold price we’re starting to see
16:38
earnings come out excuse me
16:41
cup sum up some of the gold companies
16:43
ones that I follow I’ll just give you
16:47
one that I like that I follow I don’t
16:48
have it in the portfolio but I like it
16:50
it’s a company called Caledonia mining
16:52
they have a mine a very very profitable
16:55
mine in Zimbabwe and yeah I know people
16:59
kind of scoff at that but the company
17:00
really is a performer and they really up
17:02
their guidance for this year next year
17:06
because just of the gold price and how
17:10
that leverage is translating with their
17:12
low costs and their increase in
17:13
production so you really you know with
17:17
lower fuel costs with the oil price down
17:19
that’s a major component of a lot of the
17:20
miners and that’s going to have a
17:23
knock-on effect also so it also depends
17:26
where you’re operate if you’re operating
17:27
in a country like Zimbabwe and your
17:29
costs are in Zimbabwe dollars which are
17:31
being depreciated by the government and
17:33
yet you’re selling your commodity for US
17:35
dollars that also helps quite a bit I
17:40
want to give some other things here
17:42
quickly us to create a uranium reserve
17:46
we saw the news it was all over the
17:47
tortoise Twittersphere you
17:49
twit it looks like that starting next
17:55
year the Trump administration put into
17:58
the budget to create a uranium reserve
18:04
if you will 150 million dollars a year
18:06
for the next ten years do I think that’s
18:09
a major market mover no but I think it’s
18:13
it’s part of the commitment the Trump
18:14
administration is making to uranium and
18:17
to nuclear power in the US I mean we are
18:19
totally behind everyone else I mean it’s
18:22
just ridiculous
18:22
I mean somewhere close to 20 percent of
18:28
our our power in the United States is
18:32
from nuclear power and we don’t even
18:34
mind 1% of our fuel and process it here
18:37
I mean that’s just a national security
18:38
issue not only that just based on our
18:40
nuclear Navy fleet so I think that if
18:44
the if Trump gets reelected he is
18:48
pro-nuclear I’m Pro nuclear I think this
18:50
is good for the country
18:52
we shouldn’t be relying on Russia and
18:56
causality z’ and for our uranium it’s
19:02
just not in our interest to do that we
19:05
also need to get you know I’ve always
19:06
been an advocate for this I’m gonna say
19:08
it again
19:08
you know if you really are into stem
19:10
which is science technology engineering
19:11
and math and you really want high wages
19:14
and you really want to deal with climate
19:16
change if you if you think that co2 is
19:19
the control knob for climate then why
19:22
not do something like build 100 nuclear
19:25
power plants in the next 10 years or 20
19:27
in 10 years or something like that
19:28
because these are high paying jobs and
19:30
long life construction projects very
19:32
technical even for the operations
19:34
personnel that work there you have to
19:36
have be very highly educated
19:38
these are high-paying jobs it would
19:41
create a infrastructure manufacturing
19:45
infrastructure based here in the US that
19:46
we could export and we’ve just left this
19:49
to the Chinese and Russians and that’s
19:51
just stupid because the Chinese and
19:53
Russians use their nuclear industry to
19:58
gain political footholds and countries
20:00
and to cozy up with him and they
20:02
run the thing fullcycle they’ll come in
20:04
engineering procure and construct then
20:06
operate then deal with the fuel supply
20:09
and the waste you just sit there and you
20:11
know charge for the electricity while
20:13
they run everything so that helps their
20:16
home industries that are involved in
20:18
this it helps them politically as they
20:21
go around the world and try to woo
20:24
various countries to their block so the
20:31
u.s. from any perspective you look at if
20:34
you are look at it from wages climate
20:36
change energy supply energy diversity
20:40
national security it just makes sense
20:42
and I think that you know a lot of
20:46
people make fun of Trump but I think he
20:48
does he spot-on on this so this isn’t a
20:52
game changer but it’s more you know more
20:54
wind in the sails and it certainly isn’t
20:56
going to hurt things now I want to bring
20:59
up some things this is gonna get me some
21:01
bad mail people don’t like this wanted
21:04
to talk about read some good articles
21:06
this week about the energy transition in
21:09
Germany’s fleet joke it’s it’s it’s big
21:13
problems I’ll put an article up had it
21:17
really pretty good vignettes in there I
21:19
mean basically you know here’s that
21:20
here’s a slide from the article this is
21:22
green Germany’s proposed coal plant
21:25
expansions you know you’ve got your yeah
21:28
just in the yellow that you’ve got for
21:30
these late-night mines
21:31
that’s that surface mining with that
21:33
cheap dirty coal of course you got the
21:35
other plant sees that these are plants
21:37
that are going to be built because solar
21:41
and wind are not getting that the energy
21:43
transitions not happening and the Merkel
21:46
regime there which is not going to be in
21:48
power much longer I don’t think well is
21:52
you know did a snap judgment on shutting
21:56
down or phasing out and shutting down
21:59
the German nuclear fleet which is in
22:02
progress so you have to get power from
22:04
somewhere so now you have a situation
22:06
where Germany is now suffering power
22:08
rates are some of the highest in the in
22:10
Europe German industry is suffering
22:14
people are suffering because they don’t
22:16
have there’s poor people there that
22:17
don’t have enough money to pay there’s a
22:20
link to an article in the article that
22:23
I’m going to link to where people are
22:24
shifting to wood stoves and they’re
22:26
sneaking out into the woods and chopping
22:28
down wood illegally I mean it’s it’s not
22:32
working it’s not gonna work and I think
22:34
that you know just in the article the
22:36
one article there’s linked to and
22:38
they’re you know it gave it vignette of
22:40
you know Merkel just as just does things
22:43
on a snap judgment she’s a consummate
22:45
grubby politician and with her finger in
22:49
the wind so you know with the Greens
22:51
party making inroads in Germany she’s
22:55
counting to it but the problem is is
22:57
that you know it’s hurting business and
22:59
industry and jobs and most people
23:02
there’s a lot of people that don’t care
23:04
about that that green a lot of people in
23:07
the green movement could care less they
23:09
want deindustrialization they want you
23:12
know they tie everything into socialism
23:14
and equality and to you know however
23:17
they define it rights of different
23:20
indigenous peoples all this thing is
23:22
just tied into one big goulash that they
23:24
create and they’re in their philosophy
23:26
and they could care less
23:27
but the majority of people do care the
23:30
majority of people do not want to see
23:33
their standard of living go down the
23:34
majority of people want a better you
23:39
know standard of living and I believe
23:41
that you’re going to see a big upheaval
23:43
in German politics culminating with a
23:45
reversal I think of the nuclear band and
23:50
I think Germany may even start building
23:52
nuclear plants
23:53
I mean I’ve put up article after article
23:55
you can’t even build a new wind farms in
23:57
Germany the opposition out in the
23:59
hinterlands and farms and rural areas is
24:03
just too high they will not allow it and
24:05
especially the East Germans East Germans
24:07
have had enough of this they they see
24:10
right through it and that’s why you’re
24:13
seeing AF D alternative for Deutschland
24:16
make inroads in some of the recent
24:18
elections and you’ve also seen you know
24:21
this this has led to the Christian
24:24
Democratic Union Merkel’s
24:27
Hera parents she actually resigned
24:29
because of something that just happened
24:31
in one of the states German states in
24:34
East Germany one of the CDU person that
24:38
was elected got elected with the support
24:40
of the AFD in a coalition and that was
24:44
determined to be racist and all that
24:45
stuff to say FD supposedly is right-wing
24:47
and so this governor resigned and that
24:51
reflected back on the Hera parents so
24:53
there’s a lot of upheaval coming in
24:55
Europe that’s a whole nother video just
24:59
about you know the EU is on its way out
25:02
this is not sustainable
25:04
there’s too many competing agendas and
25:07
it’s just not going to last and breaks
25:11
it is the beginning the populist revolt
25:13
whether it’s populism coming from the
25:14
left or the right
25:15
it will continue around the world the
25:20
other thing to point out and the article
25:22
which I thought was interesting or I got
25:24
this from somebody else I can’t remember
25:26
here are the emissions of co2 in Germany
25:29
I believe 2009 was the year they started
25:32
the energy transition and I somewhere
25:35
around here I can’t remember I have to
25:36
look it up the energy and I can’t
25:40
pronounce it so they long german word
25:41
that means energy transition basically
25:43
the solar and wind but you see there’s
25:46
really not been no decline and that
25:48
emissions of co2 in germany you know if
25:51
you wanted to get this down you get your
25:54
nuclear fleet back and you get rid of
25:56
all those coal plants and why are you
25:58
going to build more coal plants that
26:02
does say in the article though that
26:03
because these are supercritical boilers
26:06
supercritical blowers are boilers that
26:07
run at like 3000 psi coal-fired they
26:11
actually have 30% reduced emissions of
26:14
co2 but you’re still going to be pumping
26:16
out a lot of co2 and this number is not
26:19
gonna get better so something to watch
26:23
you know like I said I’ve said this
26:25
before you know Germany is a real-life
26:26
Laboratory of a major industrial country
26:29
that has attempted and we can argue in
26:33
state if actually that is still trying
26:36
to attempt to do an energy transition
26:38
from fossil fuels to
26:40
it’s simply you see what happens it’s
26:43
not working it cost a lot of money power
26:46
rates go up and you know what your net
26:48
co2 doesn’t go down
26:49
that’s like I’ve said before there’s a
26:51
reason why we use Coal Fired there’s a
26:53
reason why we use nuclear power because
26:55
large base load generation is cheap and
26:58
reliable that’s why we use it you’re not
27:01
going to play solar panels into Baltic a
27:04
lot of the Baltic Sea where you know and
27:06
it does the Sun doesn’t shine that often
27:08
that’s just I mean the certain areas
27:10
it’s not Arizona or Texas where the Sun
27:14
shines all the time or Florida or
27:15
Southern California this is Germany for
27:17
heaven’s sakes northern Europe but you
27:20
can’t explain to some people I want to
27:23
point out another thing saw an article
27:26
shale pioneer John Hass heading off
27:28
Shores Hess production Hess oil from the
27:35
article production of the Eagle Ford
27:37
Shale in South Texas is starting to
27:39
plateau while the bat Bakken field North
27:41
Dakota where Hess as a major producer
27:43
will hit its peak production levels
27:45
within the next two years this is a
27:47
speech that our presentation has gave at
27:50
a recent oil conference the Permian
27:53
Basin the top US shale field in Texas
27:55
and New Mexico will plateau plateau in
27:58
mid decade and is already facing well
28:00
interference issues has said so has John
28:05
Hess plans to use cash flow their Hess
28:07
company it’s a big very big oil company
28:10
plans to use cash flow from the Bakken
28:11
to invest in longer-term offshore
28:13
investments the company is relied on
28:15
offshore Guiana one of the world’s most
28:18
important oil and gas discoveries in the
28:19
last decade so just another piece of
28:23
information piece of the puzzle you know
28:27
I really about shale peaking and shale
28:32
accounted for 98 percent of the oil that
28:37
met the demand increases over the last
28:39
you know five six years in the world you
28:43
know oil demand goes up a million
28:45
barrels to a million point one point
28:47
five million barrels a day every year
28:49
increases by one to 11.5% every year
28:53
and that increase has been met by the
28:55
increases in shale production it’s been
28:58
huge
28:58
so non-opec conventional oil has not
29:03
been invested in it’s not been a
29:05
contributor and OPEC is just sitting
29:08
there we don’t you know it’s it’s the
29:10
call on OPEC has not been to increased
29:12
production so I think what’s going to
29:15
happen if things stay correct and we see
29:18
this decline in growth and shale which
29:23
is happening if it stays consistent if
29:27
in fact we are at the top and this
29:29
thing’s rolling over which I believe it
29:31
is that being shale the cup there’s not
29:38
that enough investment main offshore
29:39
that’s been my thesis and that’s where
29:41
people that’s where the money’s gonna go
29:42
now the problem is is with this
29:44
coronavirus it kind of short-circuited
29:46
the recovery in oil prices we don’t
29:49
really know we have to watch inventory
29:51
levels things are very chaotic right now
29:53
we don’t have enough information we
29:55
don’t know where this is going to end
29:57
but you know looking out three to five
30:00
years I hate to say that because you
30:02
know it’s like you just keep saying that
30:04
every year another three years and
30:05
people just aren’t going to wait that
30:07
long I get it but you know if you look
30:10
at the Reserve life indexes of major oil
30:12
companies if you look at the investment
30:15
dollars that have went into oil
30:17
exploration it’s not been enough to
30:19
sustain production and the penetration
30:22
of electric vehicles is not going to be
30:24
sufficient in the timeframe that’s
30:25
necessary to create demand destruction
30:30
and oil I mean in fact electric vehicle
30:33
sales were down last year they weren’t
30:35
up so that should tell people something
30:39
I think oils gonna be around for a lot
30:41
longer and once we get to this
30:43
coronavirus which has really been a
30:45
septic shock to the oil and commodity
30:49
markets we’ll have to see what happens
30:50
as we come out of this but I think as
30:54
this thing gets back on plane and we can
30:55
see real data it’s gonna become more and
30:57
more obvious what’s happening that the
31:00
call on non-opec a conventional supplies
31:04
will not be able to be met because the
31:06
lack of investment
31:07
and then we’ll see if OPEC has the
31:09
weather with all or has the ability to
31:11
increase production regardless these are
31:15
extractive industries and if you don’t
31:17
invest enough money in replacing your
31:20
reserves you eventually go out of
31:21
business I mean I’ve said that over and
31:23
over and over and that’s really where
31:24
we’re at so a lot of information there
31:28
guys that’s it for this week
31:31
appreciate the support appreciate the
31:32
viewership you guys are the inspiration
31:36
to why I do this more people keep
31:38
subscribing I thank you a lot it means a
31:42
lot to me and keep on sharing keep on
31:46
liking the videos it really helps out
31:48
enjoy the comments switching to a less
31:52
stressful career so I probably should
31:54
have more time and I’m hoping to make
31:57
some changes get some more interviews
31:58
but we’ll see how things happen over the
32:00
next coming months that’s it for this
32:02
week guys thanks a lot and we’ll talk to
32:04
you next week

Why We Should Fear Easy Money

Cutting interest rates now could set the stage for a collapse in the financial markets.

To widespread applause in the markets and the news media, from conservatives and liberals alike, the Federal Reserve appears poised to cut interest rates for the first time since the global financial crisis a decade ago. Adjusted for inflation, the Fed’s benchmark rate is now just half a percent and the cost of borrowing has rarely been closer to free, but the clamor for more easy money keeps growing.

Everyone wants the recovery to last and more easy money seems like the obvious way to achieve that goal. With trade wars threatening the global economy, Federal Reserve officials say rate cuts are needed to keep the slowdown from spilling into the United States, and to prevent doggedly low inflation from sliding into outright deflation.

Few words are more dreaded among economists than “deflation.” For centuries, deflation was a common and mostly benign phenomenon, with prices falling because of technological innovations that lowered the cost of producing and distributing goods. But the widespread deflation of the 1930s and the more recent experience of Japan have given the word a uniquely bad name.

After Japan’s housing and stock market bubbles burst in the early 1990s, demand fell and prices started to decline, as heavily indebted consumers began to delay purchases of everything from TV sets to cars, waiting for prices to fall further. The economy slowed to a crawl. Hoping to jar consumers into spending again, the central bank pumped money into the economy, but to no avail. Critics said Japan took action too gradually, and so its economy remained stuck in a deflationary trap for years.

Yet, in this expansion, the United States economy has grown at half the pace of the postwar recoveries. Inflation has failed to rise to the Fed’s target of a sustained 2 percent. Meanwhile, every new hint of easy money inspires fresh optimism in the financial markets, which have swollen to three times the size of the real economy.

In this environment, cutting rates could hasten exactly the outcome that the Fed is trying to avoid. By further driving up the prices of stocks, bonds and real estate, and encouraging risky borrowing, more easy money could set the stage for a collapse in the financial markets. And that could be followed by an economic downturn and falling prices — much as in Japan in the 1990s. The more expensive these financial assets become, the more precarious the situation, and the more difficult it will be to defuse without setting off a downturn.

The key lesson from Japan was that central banks can print all the money they want, but can’t dictate where it will go. Easy credit could not force over-indebted Japanese consumers to borrow and spend, and much of it ended up going to wastefinancing “bridges to nowhere” and the rise of debt-laden “zombie companies that still weigh on the economy.

Today, politicians on the right and left have come to embrace easy money, each camp for its own reasons, both ignoring the risks. President Trump has been pushing the Fed for a large rate cut to help him bring back the postwar miracle growth rates of 3 percent to 4 percent.

At the same time, liberals like Bernie Sanders and Alexandria Ocasio-Cortez are turning to unconventional easy money theories as a way to pay for ambitious social programs. But they might want to take a closer look at who has benefited most after a decade of easy money: the wealthy, monopolies, corporate debtors. Not exactly liberal causes.

By fueling a record bull run in the financial markets, easy money is increasing inequality, since the wealthy own the bulk of stocks and bonds. Research also shows that very low interest rates have helped large corporations increase their dominance across United States industries, squeezing out small companies and start-ups. Once seen as a threat only in Japan, zombie firms — which don’t earn enough profit to cover their interest payments — have been rising in the United States, where they account for one in six publicly traded companies.

All these creatures of easy credit erode the economy’s long-term growth potential by undermining productivity, and raise the risk of a global recession emanating from debt-soaked financial and housing markets. A 2015 study of 17 major economies showed that before World War II, about one in four recessions followed a collapse in stock or home prices (or both). Since the war, that number has jumped to roughly two out of three, including the economic meltdowns in Japan after 1990, Asia after 1998 and the world after 2008.

Recessions tend to be longer and deeper when the preceding boom was fueled by borrowing, because after the boom goes bust, flattened debtors struggle for years to dig out from under their loans. And lately, easy money has been enabling debt binges all over the world, particularly in corporate sectors.

As the Fed prepares to announce a decision this week, growing bipartisan support for a rate cut is fraught with irony. Slashing rates to avoid deflation made sense in the crisis atmosphere of 2008, and cutting again may seem like a logical response to weakening global growth now. But with the price of borrowing already so low, more easy money will raise a more serious threat.

By further lifting stock and bond prices and encouraging people to take on more debt, lowering rates could set the stage for the kind of debt-fueled market collapse that has preceded the economic downturns of recent decades. Our economy is hooked on easy money — and it is a dangerous addiction.