Category Archives: US Economy

Is Shale Stale?

We follow the shale revolution from a distance lacking the bandwidth to tackle it head on. This note is a place holder for a couple of references that suggest that the exuberance over the shale revolution is misplaced. The tip-off article came from Zero Hedge: Wall Street’s Shale ‘Fraud’ Exposed. The principal link is to Shalebubble.org. The site is cleanly designed with this introduction that links two reports on the topic. Points to ponder:

  • Six plays account for 88% of total shale gas production with well decline rates range from 80-95% after 36 months in the top five U.S. plays.
  • More than 80 percent of tight (shale) oil production is from two unique plays: the Bakken and the Eagle Ford with well decline rates from 81-90% in the first 24 months.
  • For the oil fields, 40% of production must be replaced annually to maintain current production levels.
  • Dry shale gas plays require $42 billion/year in capital investment to offset declines. With 2012 sales of $33 billion, excluding benefits from natural gas liquids produced, the industry is uneconomic based on the prices received.

We note that the entities responsible for the website and the reports may have biases that influence their content. The factual data, if it stands up to unbiased scrutiny, suggests that the impact of shale-sourced energy is more limited than is generally recognized, particularly at current prices.

One Bear at a Time

Fresh from finishing Summa: The Great Myth, we came across a Dec. 13 blog entry by Doug Noland, “The Prudent Bear”, titled Q3 2013 Flow of Funds. In reading his blog we came across a section that we reproduce below adding numbering in square brackets and emphasis. We then discuss the errors in his thinking.

Summa: The Great Myth

Listening to an interview of Richard Duncan by David McAlvany we were finally motivated to explore an issue that has nagged at us for quite a while. What disturbs us is that we find ourselves alone in disagreement with the prevalent ‘wisdom’ regarding the Fed’s quantitative easing (QE) policies and their effects on liquidity and markets. This essay will explore our position.

Flash Point: If You’re American, You’re Now Really Screwed – Yellen’ About it Won’t Do No Good

ZeroHedge today reports: Yellen Timestamp: “No Bubble”. We have added emphasis below.

  • YELLEN SAYS FED DOESN’T SEE BUILDUP OF FINANCIAL RISKS
  • YELLEN SEES LIMITED EVIDENCE OF ‘REACH FOR YIELD’
  • YELLEN SAYS FED LOOKS OUT FOR ANY POTENTIAL ASSET PRICE BUBBLES
  • YELLEN DOESN’T SEE `MISALIGNMENTS’ IN ASSET PRICES

Since ZH doesn’t provide a source link we go to Fox Business: Yellen Senate Confirmation Hearings Begin. Quotes from this source areare:

  • Yellen in her opening statement credited the Fed’s interventionist policies with supporting the ongoing recovery and described the economy as “significantly stronger.” [The economy has not recovered to its pre-recession levels and may be rolling over. Contrary to what the Fed might believe, the business cycle remains, even if it is severely distorted by Fed intervention.]
  • Quantitative easing is intended to keep longer-term interest rates on loans such as mortgages low “to spur demand in the economy,” Yellen explained. [after an initial boost there is no ongoing effect. Indeed, the 30 year rate has been rising.]
  • Yellen, addressing questions related to potential asset bubbles, said Thursday she doesn’t currently see any “price misalignments” that “would threaten financial stability.” [compared to normal times, risk in the bond market and the stock market is totally mispriced.]

In short, Yellen will perpetuate the Fed policies that have so damaged markets, partly due to a blindness toward their ineffective and destructive nature.

David Stockman, in a King World News interview reinforced the above analysis:

The greatest danger is the Fed.  It has become a serial bubble machine.  We have seen this move three times already this century … and now they have inflated it even more fantastically for the 4th time.  And yet we now have testimony from Yellen, yesterday, in which she couldn’t even use the word, ‘bubble.’  She kept referring to it (the bubbles) as a ‘misalignment of prices.’

So we have a complete disconnect between the Main Street economy, which is struggling and floundering, and financial bubbles throughout Wall Street and the financial system that are clearly being fueled by the lunatic policies of the Fed.  And now we have a (Fed) chairman who can not see them, or even hear the word.

These comments crystallize the divide between private sector analysts and economists and the Fed. They represent the antithesis of what the private sector sees and in particular with QE, what academic research is beginning to dismiss as having any ongoing effectiveness.

Flash Point: It’s Structural

We have long argued that the problems of employment in the US are structural, not cyclical (Flash Point: Why High Unemployment Is Structural, Signs of a Structural Change in the US Economy, The Hole in Jackson Hole, What’s the Future for Jobs?). Today, Mike Shedlock adds his perspective on the argument: No Progress for Long-Term Unemployed; Ten Reasons the Problem is Structural.

Further, while the US is in a very tepid cyclical recovery, certainly the worst since World War II, the changes in the employment situation are also very tepid with changes in the structure of the job market to a part-time economy the most troubling aspect. Expect a similar argument for Canada.

This Is How It’s Done!

The Fed has been desperately trying to goose the US economy for years with various forms of quantitative easing, largely without success. As we have argued, there is no way of separating the effect of QE on recovery from the last recession from normal economic forces that have lead to economic recovery from every recession in history. Now, we have a new and measurable way of creating economic growth independent of QE.

Courtesy of the Commerce Department, we find that simply by revising the way GDP is calculated – cooking the numbers – we can achieve instant economic growth. The following chart from MarketWatch illustrates this achievement:

This result is even more remarkable than at first appears. Looking carefully at the two bars covering the period 1959 to 2007, we find there is essentially no revision to the growth numbers. It all occurs since 2007. Keeping in mind that the last recession started in 2007 and recessions are normally marked by negative GDP numbers, the significant difference in growth between the two methodologies for the recent period shown is actually compressed into the recession recovery since 2009.

As we said, if you can’t create economic growth by dumping tons of liquidity onto the market, simply cook the numbers to get the growth you want.

For Those Enamoured With Barack Obama …

Mike Shedlock gives us some economic statistics for Obama’s period in office, in the post: Demographic Nightmare; Recession Through Recovery in Pictures. These are:

  • The Civilian Institutional Population Rose 9.9 Million
  • The Labor Force [those employed or seeking employment] Rose .9 Million
  • Those Not in the Labor Force Rose 9.8 Million
  • Employment Fell by 2.3 Million
  • Full-Time Employment Fell by 5.3 Million
  • Part-Time Employment Rose by .9 Million
  • Unemployment Rose by 4.5 Million
  • Food Stamp Usage Rose by 20.3 Million

Putting some of this data together:

  • The number of non-workers rose by 14.3 million while the number of workers fell by 5.3 million.
  • The ratio of workers to non-workers (in millions) has fallen from 144.6 : 88.3 = 1.64 in 2008 to 142.2: 102.6 = 1.39 today.

His record speaks for itself.

Flash Point: A Retail Collapse in the US?

Bloomberg reports that Wal-Mart Struggles to Restock Store Shelves as U.S. Sales Slump. It seems that they are having a restocking issue although it is not clear whether the problem arises due to internal operations or supply chain issues. Bloomberg notes that Wal-Mart’s inability to keep its shelves stocked coincides with slowing sales growth.

This information from a leaked company document follows another leak two weeks ago: Wal-Mart Says February Sales “Total Disaster”, Worst Monthly Start Since 2006; Stock Drops. In this earlier document, a company official was quoted as saying: In case you haven’t seen a sales report these days, February MTD sales are a total disaster.

Flash Point: ‘Co-opted By Optimism’

Just before New Years and the dreaded ‘fiscal cliff’, we played around with a possible article aimed at highlighting what we consider to be the real fiscal cliff: the unrepayable US sovereign debt. We studied the Wikipedia article on the fiscal cliff and in the end decided the complexity of the issue which was shortly to become a moot point, was not worth the resource expenditure. The article cited the work of the Congressional Budget Office (CBO) in analyzing the trajectory of the US debt under different scenarios. In particular, the following Figure stood out:

Figure 1. Two CBO debt projections into 2022 (click to open in new window).

Source: An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022

Our concern was that the CBO debt projections might be somewhere between optimistic and wildly optimistic, dependent on their economic and fiscal assumptions. For example, we doubt that their projections have an allowance for new wars although they consider military activity, but it is hard to imagine that the US will not be involved in at least one major new war in the next decade, especially if Kyle Bass (Kyle Bass: One Smart Man; see the Dec. 22 entry and video link) and others are right. In a more mundane vein, we wondered what the GDP estimates  were that they used. John Mauldin’s latest eletter, Somewhere Over the Rainbow motivated us to revisit the issue from the perspective of GDP.

A Christmas Letter

We are reprinting an open letter from David R. Kotok, Chairman and Chief Investment Officer of Cumberland Market Advisors, to Mr. John Boehner, Speaker of the US House of Representatives. We do so since it is a wonderfully concise description of the US’s fiscal problems with a next step recommendation. The letter:

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