2015: what is in store?

27 12 2014

2014 is as good as over; while most people look back on the past year for world shaking events, achievements, and which celebrity got divorced, I as usual look to the future…. and 2015 could be the decisive year for Western Civilisation, not that some people ever notice mind you.

Christmas has a habit of bringing people nearer to you that you might not otherwise associate with.  Since losing faith in humanity many years ago, I’m very choosy about whom I associate with, because people more often than not just depress me with their absolute lack of foresight.  One such person who shall remain nameless proudly told me on Boxing Day about how he was going to demolish the house he’s lived in most of his life to build a two story 400 m² 6 bedroom McMansion with three phase airconditioning…… his excitement was palpable, and frankly I don’t even understand why he was showing his plans off to me, I was totally underwhelmed and it took all of my self control to not tell him what I thought of his stupid plans.  Just to make matters worse, the building company he’s planning to use is American based, so the profits won’t even stay here in Australia.  When I sarcastically mentioned that his 50 inch TV would be too small for such a house…. he agreed!  I asked him if he realised that by having three phase power he would get a triple bill, likely attached to the three service fees I would guess such a connection would entail.  It never occurred to him of course, ignorance is bliss…  Be blowed if I would pay the utility $225 a quarter even before using a single one of their electrons.  He had no idea of what I was talking about, and I can see him copping quarterly bills well in excess of $1000 in this idiotic plan.

What does this have to do with 2015?  Well folks, it’s just amazing how many of the bloggers I follow are predicting this current oil price crash is the beginning of the deflationary spiral Nicole Foss has been predicting for years….  commenting on a recent post by her writing partner Ilargi, Nicole wrote on Facebook:

We’ve been saying this would happen for a long time, that oil prices would drop as demand falls on a move into economic depression. A temporary supply glut opens up, price support evaporates, prices fall to those of the lowest cost producer and all the expensive and complex production goes out of business. No one invests in exploration or drilling or production, or probably even maintenance, for years, meaning that supply will follow demand to the downside over time. Any kind of economic recovery way down the line will then be energy supply-constrained. First financial crisis buys you time in terms of peak oil, because you burn through remaining high energy profit ratio energy sources less quickly, but then it aggravates the situation later, but collapsing supply more quickly. We are headed into a much lower energy future, and that means life is going to change.

So you see why I think my non blood relation’s timing is way off!  He of course is not the least bit interested in anything I have to say, I even discovered yesterday that he has completely disconnected me from his cyber existence, my grim readings obviously clashing with his future expectations.  Buoyed by statements like “I can’t really overcapitalise in my suburb” and “property values can only go up where I live”, he was justifying everything in his own blissfully unaware mind that life was going to change alright, only it would be for the better.  What’s a deflationary spiral he may well have asked, should he even have known to ask such a question…  And stuff his three children’s future climate too!  Ah well, you can’t save everybody, especially when they are unwilling to help themselves.

If the global economy unravels, then unemployment, underemployment, and fear will combine to reduce consumption.  Investment and GDP will decline.  The economy will deflate.  Just like the 1930s.  And Australia will not fare anywhere near as well this time as it did after GFC MkI when commodity prices were still high and Chinese demand was strong.

If the world economy deflates, fixed asset values will decline.  Rental properties are especially vulnerable.  Stagnant incomes, increasing unemployment, and credit card debt guarantee consumers will prioritize spending decisions based on urgent need: food, fuel, and then rent (or mortgage payments).  This last Christmas binge could be the last.  In periods of declining economic activity, rental property owners (houses, apartment buildings, supermarkets and so on) face potential bankruptcy because of higher vacancy rates.  It will also become increasingly difficult for rents to keep up with maintenance costs.

Meanwhile, over at Zero Hedge, Tyler Durden wrote:

One key indicator of deflation that seems to be even more worrisome to investors, however, is global commodity prices and what commodity price weakness suggests for demand. Copper fell over 12% in 2014, largely due to slumping demand in China and other industrial economies. Natural gas prices have fallen more than 12% this year. And oil prices have fallen by over 40% due to a glut of new supply and weak demand growth in many developing economies. The International Energy Agency has cut its estimates for demand for crude five times in the past six months, The Wall Street Journal reports.

The negative impact on incomes due to the decline in oil prices is a global issue, with nations such as Russia, Nigeria and Venezuela in visible financial distress.  The price of the Russian Ruble has declined in tandem with oil prices, raising concerns about whether Russia will be able to service its hard currency debt.  But the decline in oil prices is more than just a supply phenomenon.  The lack of growth in the demand for oil, coupled with rising supplies in the U.S. and elsewhere, has raised concerns about the overall health of the global economy.

We believe that the weakness in U.S. equity and debt markets stems from a more fundamental problem than concerns about future growth, namely that investors are once again starting to seriously question the disclosure from the largest banks and investment houses regarding their credit exposure to highly leveraged borrowers.  This concern is evidenced by weakness in the equity market valuations of lenders with exposure to the oil sector as well as the recent changes in the relative position of spreads in the U.S.bond markets.

Click the link below to access the full copy of the note.  Free registration is required. https://www.krollbondratings.com/show_report/1815

For an economy reliant on numbers coming from the commodity sectors (while all the other sectors are doing very poorly), Australia’s near term future looks a bit grim.  Especially as we have a government whose only economic theory is to blame the one they just replaced for all its woes and get as many people on the dole queues as fast as possible.  Then we have this:

The Dow - 1999 To The Present

Hmmmm  don’t crashes occur in seven year cycles?  Watch this space….

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8 responses

27 12 2014
Maponios

Reminds me of the post you wrote back in 2012!

27 12 2014
Oelsen

What do you complain? Those copper wires are needed for scrap! The more fixed infrastructure to barter there is, the more likely anybody can survive on it.

Now we over here in Winterstan had this wonderful moment where we *ahem* made a familial coup and hurried a quick vote on secret santa next year, “to try something new and exciting”. Fewer gifts to buy = less stress and resources for nonsense. I know that 2016 will be the year of restored family order, but as the backlash from those low oil prices now will fall exactly in that season, I expect some personal behavioral adjustments.

27 12 2014
John Doyle

Like you I feel sure we are on an irreversible deflation slide., and if the energy cliff diagrams are correct the slide will speed up and over the edge we will go, like those who fall off Uluru to their deaths. Once you start you can’t stop.

27 12 2014
foodnstuff

Pity you suffer from self-control. I’d have told him exactly what I thought.

27 12 2014
27 12 2014
pendantry

Nicole Foss: “We’ve been saying this would happen for a long time, that oil prices would drop as demand falls on a move into economic depression…”

I’m no economist but statements like these seem very chicken-and-egg to me.

Peak (worldwide crude) oil happened in 2006. From there on, the cost of extraction could only go up, making oil (in the longer term) cost more. Our entire civilisation is based on the stuff. We don’t just need it for fuel and transport, it’s necessary in food production, medicine, toothbrushes, the works. So the external costs of everything will rise… meaning that punters will not be able to afford as much as time goes on… and it seems to me that this is the root cause of the ‘deflationary spiral’; ie, it’s supply-based, not demand-based (as Nicole’s expert view suggests).

But, as I say, I’m no economist; supply/demand just seem to me to be two sides of the same two-faced coin. Given that the low-hanging fruit has all been plucked, in the long term the real cost of oil can only go up…

… ah. I’m forgetting that our entire economic system has a built in bias towards cost externalisation. Amazon.co.uk is a good example: the corporation (legally, with collusion of the political elite) fiddles its taxes, and so freeloads on the infrastructure the rest of us pays through the nose to support. It’s totally ridiculous that we allow them to get away with it (but it’s difficult to act when the politicians are working for the shysters).

O.o, rant over.

Hope you’re enjoying your solstice festivities!

30 12 2014
2015: what is in store? | operation CDL

[…] Source: 2015: what is in store? […]

31 12 2014
gbell12

Mike, demand has grown:
http://www.eia.gov/forecasts/steo/report/global_oil.cfm

And, funny how when oil DROPS by $40, the usual culprits are talking about how they sky’s falling! Most people are seeing that as good news for “the economy”, you know, business as usual.

If oil had gone up $40, the crew would be also prognosticating doom, wouldn’t they?

Some humility from these folks is required when the success of fracking and shale has been such a surprise to everyone. Not to mention a huge drop in the price of oil – I don’t think many of my sources were predicting this 5 years ago, and yet they are still arcing up.

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