Sunday, December 14, 2014

The Last War

Here is a post from Zerohedge

This is what that post says....

UMIch Consumer Confidence Goes Euphoric - Highest Since Dec 2006

Submitted by Tyler Durden on 12/12/2014 10:10

The last time Americans were this full of shits and giggles was December 2006 - according to UMich latest survey of consumer sentiment. The indicator has risen for 5 straight months accelerating each time with the biggest surge since the mid-2011 US downgrade crash. At 93.8, smashing expectations of just 89.5 by the most since March 2013, for a 5-standard-deviation beat. Inflation expectations rose (as inflation plunges) and while both current and outlook indices rose markedly, it is the hope-strewn 'economic outlook' that exploded.

A picture paints a thousand words...


If your taste runs to conspiracies you will love Zerohedge. They rehash all of the latest conspiracies about politics and economics with regularity. And if you are looking for indications of an imminent collapse in the financial world, ZH is the place to get your dope.

It has been said that the Generals always fight the last war. This is meant to say that they learn their lessons from the war they were in, and prepare their armies according to those lessons that they learned. But the Generals on the other side do the same. So the next big war is inevitably different from the last because only a fool would fight a battle ones enemy is prepared to win.

Much the same in the financial and business world. The mistakes are in the past and the survivors learn from their mistakes and the mistakes of others. It is for this reason that the same manmade calamities rarely happen the same way twice. History doesn't repeat, it rhymes. And sometimes it isn't even a good rhyme.

I do have a problem with prognosticators of macro economic distress who base their predictions on what happened last time. All of the individual players who have some size are looking out for their own hides, and the last thing they will do is place their treasure or the assets they manage in danger from a known.
It is the unknowns that we don't know that cause the big problems. (Thanks to Don Rumsfeld) And what the conspiracy buffs talk about are the knowns.

The latest threat to U.S. finance seems to be related to the sudden drop in the price of oil. The oil industry in the U.S. has invested large amounts of cheap capital in the production of shale oil and gas over the last several years, and it is paying off in cheap energy costs. Now that the price of that product is dropping there are questions regarding which of these new drillers and energy miners will be able to survive these low prices for their products. I have heard that the high yield debt of the oil industry makes up approximately 20% of the corporate junk bond market in the U.S.  It seems inevitable that some of these companies will go bankrupt and default on their debts. Who is holding those bad debts is one question casting a pall.
Another is how long the price of oil will remain low. The Saudis seem to be resolute in holding their production at its present level. It is not in their immediate interest to support the price of energy now.
There is talk of the market finally reaching a "true market level" after long speculators are flushed out. Some of the big banks have apparently abandoned their commodity positions. The talk seems to be that energy could go much lower. That implies that those talking think there is still money to be made in the decline.
The problem with market solutions is that the market will now be waiting for supply to decline as producers shut down. And the market will tend to be short energy prices. But as the first indications come of a bottom in supply the market will move the other way. Not only the shorts will cover, but those who need the product will anticipate a shortage and stock up. A sharp reversal is possible.

The other side of the equation is demand. As the above ZH article is pointing out, consumer confidence is the highest in many years. This is not only due to low gas prices. It has as much to do with increasing employment numbers, wages increases in the works, and the paying down of debt that much of the workforce has been doing over the last few years. Debt is the last war. We won't make that same mistake for awhile. The Japanese haven't made that mistake for awhile either. (20yrs!)
The only people who make a mistake are the generals.
And the people in charge at the Federal Reserve could only be thought of as generals. But their mistakes have been widely studied as well. So perhaps there are few known unknowns there.

I can come to no firm conclusions or indications of the future course of financial markets at this time. The recent weakness in stocks, and it is only a few days of declines, may be no more than short term jitters over recent junk debt problems. But finance fixes itself. And energy demand and supply fixes itself. (Until the shale and frack gas runs out, and that will be several years) I do think we may see reversals in energy that are not expected. And we may see things in the stocks that are unexpected. The speculative reversals will probably be initiated from the political side of the jungle. I don't think consumer confidence will reverse. People are about ready to get on with the party.

Staying on my toes,


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