The Economics of a Crash - Alasdair Macleod
Bloomberg was out today heralding the “new bull market” in oil. I herald it as Bloomberg’s new bullmarket in bullshit. The price of oil is determined in the short run by a lot of factors besides the law of economics. The spike up today in the price oil was most likely technically driven by hedge funds covering large short positions put on over the past couple of weeks. The short-cover trigger was likely a big bid put into the market by the Too Big To Fail banks backed by the Fed.
Make no mistake about it, the Federal Reserve in conjunction with the big banks have “blood money” motivation to try and keep the price of oil propped up. The big banks are exposed both on and off balance sheet to the price of oil. Many of the big banks are heavily exposed on-balance sheet to the collapsing oil shale/fracking industry in the form of hundreds of millions of asset-based revolvers. These are shorter term funding facilities, the size of which is determined by the value of the estimated shale reserves of the borrower. However, many of these revolvers were drawn down when the price of oil was much higher. It is highly probable that the big banks like JP Morgan are sitting on drawn revolver facilities that are worth dimes on the dollar.
Preventing this default has become a growing problem and is the primary task facing central banks. Household, corporate, government and financial sectors are all exposed to debt default, ensuring political and business considerations will allow no alternative outcome. – Alasdair Macleod
