You're not crazy. The world we now live in is.
Men,
it has been well said, think in herds; it will be seen that they go mad
in herds, while they only recover their senses slowly, and one by one.
~
Charles Mackay (1841)
Like
me, you may often feel gobsmacked when looking at the world around you.
How did things get so screwed
up?
The
simple summary is: the world has gone mad.
It’s
not the first time.
History
is peppered with periods when the minds of men (and women) deviated far from
the common good. The Inquisition, the Salem witch trials, the rise of the Third
Reich, Stalin’s Great Purge, McCarthy’s Red Scares — to name just a few.
Like
it or not, we are now living during a similar era of self-destructive mass
delusion. When the majority is pursuing — even cheering on — behaviors that
undermine its well-being. Except this time, the stakes are higher than ever;
our species’ very existence is at risk.
Bizarro Economics
Evidence
that the economy is sliding into recession continues to mount.
GDP is slowing. Earnings warnings issued
by publicly-traded companies are at a 13-year high. The most reliable recession predictor of the past 50 years,
an inverted US Treasury curve, has been in place for the past quarter.
Yet the major stock indices
hit all-time highs earlier this week. And every one of the 38 assets in the
broad-based asset basket tracked by Deutsche Bank was up for the month of June
— something that has never happened in the 150 years prior to 2019.
It has become all-too clear
that markets today are no longer driven by business fundamentals. Only central
bank-provided liquidity matters. As long as the flood of cheap credit continues
to flow (via rock-bottom/negative interest rates and purchase programs),
keeping cash-destroying companies alive and enabling record share buybacks, all boats will
rise.
So
this week, the world found itself waiting for the release of the latest jobs
report. And here’s how perverted things have become: investors were praying for
disappointing data. They WANTED to see more warning signs of the recession
threat.
Why?
Because
a worsening macro outlook will make it easier for Federal Reserve Chair Jerome
Powell to deliver on the future interest rate cuts investors are counting on.
And rate cuts should boost stock prices higher (as well as the prices of nearly
all other assets, too).
In a
sane world, when signs of an approaching recession are visible, stocks and
other risk assets should be nowhere near all-time highs. And should
recessionary warnings mount, stocks should start diving, as recession = lower
earnings + higher interest rates = lower valuations.
But in today’s bizarro world,
investors pray for bad data.
One
day — likely soon — investors will get exactly what they’re asking for. And
when the next recession arrives in force, and zero/negative interest rates fail
to stem the tide of layoffs, bankruptcies and defaults, they’ll realize too
late that the trade-off of artificially high asset prices today for an
eviscerated economy tomorrow was a fool’s bargain.
Bizarro Energy Policy
Like
it or not, our economy and our way of life remains incredibly dependent on
fossil fuels.
Given
that, reason would dictate we should treat our remaining — and finite — fossil
energy deposits as national treasures, to be put to the best and highest
possible use, and conserved as much as possible.
But in today’s bizarro world,
we instead rush as fast as we can to extract and burn as much as we can. At an
economic loss.
It’s true that the
decade-long shale oil revolution has yielded a staggering amount of production
from America’s soils .The US accounted for 98% of global oil production growth in
2018 and is on track to hit a record 13.4 million barrels per day of
production by the end of 2019.
But those volumes won’t last.
As we’ve carefully explained in our Crash Course video chapter on Shale Oil,
these shale basins are a short-lived bonanza given their extreme exponential
decay (85% of a shale well’s lifetime output is extracted by year 3) and the
fact that the most-promising plays have already been drilled. What’s left is
increasingly just dregs.
But
making today’s frenzied efforts to drain our shale basins even more regrettable
is that we’re doing it unprofitably. We’re rushing to export our arguably most
valuable national treasure and losing money in the process.
How
does this serve us?
A ‘’Gusher Of Red Ink’’ For
U.S. Shale
Yet another downturn could
not come at a worse time for U.S. shale drillers, who have struggled to turn a
profit. Time and again, shale executives have promised that profitability is
right around the corner. Years of budget-busting drilling has succeeded in
bringing a tidal wave of oil online, but a corresponding wave of profits has
never materialized.
Heading into 2019, the
industry promised to stake out a renewed focus on capital discipline and
shareholder returns. But that vow is now in danger of becoming yet another in a
long line of unmet goals.
“Another
quarter, another gusher of red ink,” the Institute for Energy Economics and
Financial Analysis, along with the Sightline Institute, wrote in a joint report on the first quarter earnings
of the shale industry.
The report studied 29 North
American shale companies and found a combined $2.5 billion in negative free
cash flow in the first quarter. That was a deterioration from the $2.1 billion
in negative cash flow from the fourth quarter of 2018. “This dismal cash flow
performance came despite a 16 percent quarter-over-quarter decline in capital
expenditures,” the report’s authors concluded.
They argue that the
consistent failure for the sector as a whole to generate positive free cash
flow amounts to an indictment of the entire business model. Sure, a few
companies here and there are profitable, but more broadly the industry is
falling short. The “sector as a whole consistently fails to produce enough cash
to satisfy its voracious appetite for capital,” the report said. The 29
companies surveyed by IEEFA and Sightline Institute burned through a combined
$184 billion more than they generated between 2010 and 2019, “hemorrhaging cash
every single year.”
Rystad
Energy put it somewhat differently, although came to the same general
conclusion. “Nine in ten US shale oil companies are burning cash,” the
Norwegian consultancy said late last month. Rystad studied
40 U.S. shale companies and found that only four had positive cash flow in the
first quarter. In fact, the numbers were particularly bad in the first three
months of this year, with the companies posting a combined $4.7 billion in
negative cash flow. “That is the lowest [cash flow from operating activities]
we have seen since the fourth quarter of 2017,” Rystad’s Alisa Lukash said in a
statement.
More
than 170 U.S. shale companies have declared bankruptcy since 2015, affecting
nearly $100 billion in debt, according to Haynes and Boone. There have been an
estimated 8 bankruptcies already this year, with some $3 billion in debt
restructured.
“Frackers’
persistent inability to produce positive cash flows should be of grave concern
to investors,” authors from IEEFA and the Sightline Institute wrote. “Until
fracking companies can demonstrate that they can produce cash as well as
hydrocarbons, cautious investors would be wise to view the fracking sector as a
speculative enterprise with a weak outlook and an unproven business model.”
Bizarro Environmental
Destruction
And
if the above weren’t bad enough, when we look at what we’re doing to the
natural systems we depend on to simply exist, the data is downright horrifying.
A
full listing of recent depressing scientific findings would read encyclopedic.
So I’ll just stick to the big picture: species extinction is happening at the
highest rate ever, short of a massive meteor slamming into the planet.
The world’s plants are
disappearing 500x faster than they should. The
global animal population has decreased by 60% since 1970. The UN
now predicts a million more species will go extinct within the next few
decades.
But in today’s bizarro world,
there’s a perverted incentive to sacrifice biological capital for financial
capital.
The
scarcer the tuna become, the higher the price the fisherman will get for his
catch at market. As long as commercial demand is kept artificially boosted by
central banks, the economic incentive to bulldoze the next hectare of
rainforest will continue to overpower the argument to conserve it.
Whoever
hooks the last tuna in the oceans will get one hell of a price for it. But tell
me, what will the 8+ billion humans left on earth eat then?
Your Positive Action For The
Day
If
you’re a regular reader of PeakProsperity.com, little of the above comes as a
surprise to you.
You’re likely very well aware
of our stance that developing a more resilient way of life, of
living within our financial/energetic/ecologic budgets, both as individuals and
as a society, is our path out of the tremendous hole we are currently creating
for ourselves.
Our book Prosper!:
How to Prepare for the Future and Create a World Worth Inheriting gives
specific guidance on how to actively cultivate resilience across your
lifestyle. Most of you have read it.
But
many haven’t. And most folks out there remain unaware of the bizarro behavior
driving society’s future prospects — and the planet’s — into the abyss.
So,
we here at Peak Prosperity have taken our best effort at creating a
‘comprehensive yet concise’ article designed for sharing with the friends,
colleagues and family in your life whose eyes aren’t yet open to the brewing
predicaments mentioned above.
Here’s the article,
titled Why The Next Downturn Will Be The Most Destructive In
Modern History — And Why You Must Act Now In Order To Preserve Your Wealth (and
the Planet!)
Our
intent is to awaken new minds to the challenges we face and instill a sense of
urgency to act, but provide a ‘call to greatness’ inspiration vs a
huddle-in-fear response. And, most important, our goal is to encourage folks to
take at least one immediate act that will increase their personal level of
resilience.
We’re circulating this
article widely through all of our website/syndication/social media
channels. Our ask of you today is to share it amongst any audiences you
think it could benefit.
Will
we awaken the majority of the masses overnight? No. But every transformative
movement began with a motivated group who possessed a revolutionary way of
thinking, and successfully carried that light into the world.
Help
us carry the light today. Today’s bizarro world sorely needs it.