Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

The Oil-Fueled Economic Cycle

Commodities / Crude Oil Jan 15, 2015 - 06:31 PM GMT

By: Harry_Dent

Commodities

I’ve been focusing on this fracking and high-yield debt bubble precisely because it’s most likely to become the new trigger that the housing and subprime bubble was to the last global financial crisis in 2008/2009.

Bubbles just go on and on until they either get so extremely high that they burst of their own weight — as with the tech bubble — or more often when something triggers defaults that then cascade through the very debt markets that helped create the bubble.


We have even greater U.S. and global debt levels than in 2008, with unprecedented stimulus and money printing, as if you could cure excessive debt with more debt.

Looking Back

The last crisis was triggered by a subprime crisis that focused in just four states: California, Florida, Arizona and Nevada. The high foreclosure rates are still in these states (along with Detroit and narrow parts of the Midwest that have seen massive job losses and demographic implosion).

Such a global crisis couldn’t occur without everything we’re seeing right now…

Extreme fundamental trends are rapidly affecting demographic spending, the highest public and private debt ratios in the developed countries and the emerging market debt bubble… these are all coming together to bring on the next global debt crisis that will only be greater.

Falling commodity prices, especially oil, will continue to trigger more debt crises, like falling home prices did in the last one. The commodity plunge is already killing countries like Venezuela, Russia, Iran and Iraq.

The first to go will be the U.S. frackers increasingly defaulting on high-yield or junk bond debt. The second will be emerging country companies defaulting on U.S. high-yield bonds and bank loans.

Then the house of cards will fall as it did in 2008 when high-yield or junk bond rates spiked from 7.5% to 23.5%.

Such yields have already spiked from 5% to 7% and higher risk energy bonds from 5.5% to 10%. This time around the junk bond yields overall could spike from 5% to 25% or more!

Just as falling home prices, which no one expected, triggered the subprime crisis; falling oil prices will trigger the fracking and high-yield debt bubble. The high-yield bond market already sank 10% recently with energy-based bonds falling 20%.

And of course, the raging stock markets are largely ignoring this crystal clear peril.

The chart below shows how dominant horizontal drilling (fracking) in red has become in recent years in the U.S.

Note that fracking started to accelerate in 2003, and like traditional vertical oil wells, took a dive in 2008/early 2009 as oil crashed from $147 to $32. All types of rigs boomed simply due to rapidly rising oil prices into late 2007 as you would expect. But vertical wells still dominated at about 75% at the top of the last boom in late 2007. Now it has flopped to the opposite, near 75% from horizontal and fracking. How did that happen?

What changed after 2007 was the quantitative easing (QE) money printing that drove junk bond yields to unprecedented low rates of 5% and this was a huge advantage for fracking. Horizontal wells have high upfront discovery costs and then low pumping costs — but unlike traditional wells, they only last two years on average.

So, you have to keep borrowing and drilling.

This approach depends even more on financing and such cheap borrowing rates made it more profitable and competitive, along with the next rally in oil back to $115. The QE bubble created the fracking bubble and now it’s nearly 75% of oil production and concentrated in two states, Texas and North Dakota.

Now with oil prices plunging again, the entire fracking industry is not competitive unless oil prices get back toward $100 and that ain’t going to happen — mark my words!

Many drillers will not be able to pay back these high-yield bonds and leveraged loans — just like the subprime mortgage borrowers with no down payments when home prices collapsed.

So what am I watching over the coming months? Not Fed policy, I’ll be keeping a close eye on oil prices!

As I have forecast recently, the most likely scenario is a near-term rally back to the $64 to $76 range and then another crash down to as low as $32 where they bottom…

One way or the other, the next oil crash is very likely to trigger the next debt crisis and the stock crash.

Harry

http://economyandmarkets.com

Follow me on Twitter @HarryDentjr

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.

Copyright © 2015 Harry Dent- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules