"We Track the Financial Collapse For You, so You'll Thrive and Profit, In Spite of It... "

Fortunes will soon be made (and saved). Subscribe for free now. Get our vital, dispatches on gold, silver and sound-money delivered to your email inbox daily.

This field is for validation purposes and should be left unchanged.

Safeguard your financial future. Get our crucial, daily updates.

"We Track the Financial Collapse For You,
so You'll Thrive and Profit, In Spite of It... "

Fortunes will soon be made (and saved). Subscribe for free now. Get our vital, dispatches on gold, silver and sound-money delivered to your email inbox daily.

This field is for validation purposes and should be left unchanged.

China And Fracking: The Pillars Of “The Recovery” Are Crumbling

When historians sort out this era of once-a-decade financial bubbles, they’ll marvel at how dissimilar the drivers of each boom were. The junk bonds of the 1980s were essentially leveraged tools for extracting wealth from companies. The dot-coms of the 1990s were vehicles for exotic new technologies and untested business models. The sub-prime mortgages and credit default swaps of the 2000s were semi-fraudulent fee-generation schemes.

All, in retrospect, were strange, unsteady foundations on which to build a global economy. But they look positively sane compared to the pillars of the current expansion: China and fracking.

As the true extent of China’s debt binge becomes apparent, the only reasonable reaction is awe. To cook the story down to its essence, the world’s biggest developing country decided to become developed in the space of a few years, borrowing nearly as much money as the entire rest of the world and using the proceeds to buy up every conceivable kind of industrial commodity. The result was a natural resources boom that, for a little while, floated the global economy on a rising tide of leverage. For much more detail, see this long Zero Hedge analysis.

Then, as all debt binges eventually do, this one ended in a tangle of malinvestment and evaporating cash flows. China’s excess capacity in basic industries like steel and cement is now epic. Mass layoffs are being announced daily. Its velocity of money — a measure of the tempo of economic activity — is the lowest in the world. And external trade is collapsing, with February imports and exports falling 13.8% and 25.4%, respectively.

Now in damage control mode, China is spending its foreign exchange reserves in a probably-futile attempt to keep its currency from plunging, while capital is pouring out of the country in search of safe havens and hedge funds are placing billion-dollar bets on a big yuan devaluation.

China forex reserves March 16

China, in short, has become a drag on the global economy rather than its savior. And much, much worse is coming.

Now on to fracking, which involves pumping toxic industrial chemicals into the ground to free up hard-to-reach oil and gas reserves. For a while, this was the Internet of the energy business, captivating bankers and entrepreneurs and igniting a scramble for prime drilling rights.

Between 2006 and 2014, US natural gas production rose from 64 billion cubic feet a day to 90 billion while oil production rose from 5 million barrels a day 9 million. Along the way, fracking produced millions of well-paying jobs, lifting whole US regions from bust to boom and generating massive tax windfalls for favored states.

But this too was a leveraged mirage. The surge in supply swamped a global market that was already slowing due to China’s bursting credit bubble. The result was a crash in oil and gas prices and a bloodbath in the US oil patch.

Rig count March 16

All those now-idle rigs cost someone a lot of money, much of it borrowed from banks and junk bond investors. So unless oil and gas return to 2012 levels in short order, the year ahead will see a rolling wave of bankruptcies and huge write-offs for lenders, pension funds and yield-seeking retirees. All of which, like China, constitute a drag on growth.

In a system that seems incapable of functioning in the absence of bubbles, the question now becomes: What can the monetary authorities convert into the next bubble? And the answer is not at all clear. A case can be made that the rush into negative-coupon German and Japanese bonds is bubble-like. But this doesn’t seem to be generating jobs or income for anyone — just the opposite. Buying a negative interest rate bond is a bet on shrinking capital.

In the US, cars were hot for a while but subprime auto lending is already hitting a wall and will likely go the way of China and fracking in the year ahead. Solar power? Maybe, but growth there comes at the expense of coal and natural gas, so it’s a wash in the short run. Finance? Forget it. Negative interest rates are an existential threat to traditional lending, and the big banks are all retrenching. Government funded infrastructure? That’s a liberal politician’s dream, but it sounds a lot like what China just did, and bubbles tend not to repeat in this way.

The terrifying conclusion is that other than a major war, there’s nothing out there capable of generating another global bubble. And absent another bubble, there’s nothing between us and the abyss.

25 thoughts on "China And Fracking: The Pillars Of “The Recovery” Are Crumbling"

  1. War destroys wealth in uncontrollable ways. WW2 misallocated assets. I still recall fleets in Bayonne, NJ being decommissioned, and scrapped. Do we have wealth now to dissipate? Do we have a generation of young people to slaughter? Are we capable of fielding armies of 18 year old children as we did in WW2?

    What that war and the preceding depression did do was postpone demand, then unleash it in 1947. Today we have student debt, poor education, and public and private debt that are postponing demand and standing in the way of our refurbishing infrastructure. As the wars in Iraq and Afghanistan demonstrate to the world, the United States has reached the limits of what it can achieve with violence.

    If you want a boom, start with a Jubilee of Biblical proportions and wipe out all debt, public and private. Shrink the military. Shrink government. Do a people who actually govern themselves need bureaucracies to tell them what to do? No more government borrowing. It’s the voluntary sector that eschews violence and produces. Retire all the professional politicians. Unleash the millennials.

  2. The next bubble is longevity medications along with taller blonder whiter younger therapies, then preservation of conscious mind technology along with incarceration infrastructure , then lunar colonization boom, etc transmutation…reviving the dead….uniting two entities into one conscious being….

  3. This bubble based as well as debt based economic system that is used globally with each region pumping up their economies via a central bank that can create money out of thin air is on the verge of terminal decline due to the peak debt situation these countries/regions now find themselves in. Creating money out thin air which is the primary underpinning of these debt based economies has led them into unstainable dead end streets, cannibalized/eliminated the past production/manufacturing capabilities, and/or oppressed potential competitive threats to existing crony industries, thus destroying the needed innovation and creativity that is needed to continually rejuvenate a thriving economy. This highly unstable, debt-based, central bank/fractional reserve bank funded system incorporates strong elements of totalitarianism, fascism/corporatism, and communism to keep the status quo in place at the expense of providing the elements needed to provide a sustainable, truly progressive (in the best sense of the word, not the politicized definition) economy that gives everyone a decent shot at improving their own lives while at the same time improving the world around them. The governments and their cronies in place around the world are about power and wealth for the select few at the expense of everyone else and this is proven by the extreme income inequality that this debt base, central bank funded system generates at an ever worsening rate. This by design, not by accident. China has made a huge transformation of its economy and society due to incorporating strong elements of capitalism into its system but still has a long way to go if it hopes to create a sustainable, thriving economy not blown up by the extremely thin legs of their existing and growing debt bubble. The Chinese government, like the rest of these debt based economies have about reached the apogee of their debt based systems and the time is near for all of them to pay the piper. The people in these countries/regions will likely be very angry when all the artificial supports of this funny money system collapse and people will be forced to find their own solutions because their governments will be broke. That is not necessarily a bad thing but the interim will likely be very messy before we start seeing light at the end of the tunnel.

    The success of fracking was due to high oil prices and low interest loans, both of which do not now exist. The oil price looks like is has bottomed but that does not mean the price will go back up to former highs. As has been mentioned, the slowing world economy, the existing glut of oil, and other alternative energy sources will likely prevent oil from reaching its recent former highs in the near future. The one thing that can change that is the continuing contraction of supply to a point where the current glut disappears and a supply shortage appears. A wildcard in this scenario, is if a major geopolitical event like an economic collapse in a major oil producing nation or a full-out, no holds barred war in the Middle East that drastically cuts supply. Interest rates for frackers have risen and may continue to rise. Some marginal fracking companies have already gone bankrupt and more may follow. The more efficient, better funded frackers with good properties will probably survive in a lower oil price environment. But one thing all frackers have to deal with is the short-lived nature of fracked wells compared to conventional wells, which makes their business model much more capital intensive. For similar views and where to put your money in these very difficult times, http://marketscope.ca/.

  4. well done John! Just a couple of comments:
    1. Democrats get in and Fracking is over with. I believe they will out law it for their “renewable energy” pipedream.
    2. Next bubble has already started and it is the government bubble. the size and scope of all governments in the US and especially the Federal Government has grown by leaps and bounds for the last 8 years now and there is no sign it will slow down. as all we hear is we need more government help for every group that exist.

  5. Very, very well written John.

    The other option is to let the global economy blow and then when the chaos hits bring all hands on board to create a new global currency and central bank. All past debts and credits to be negotiated, (who wins who loses) based on multinational political decisions.

    Of course the World War 3 option is still out there. There are many in Washington who still believe it can be won.

    1. Have you met our politicians? That “other option” is right out. Good thing there is no region in the world that is so volatile that if you throw a rock at it it will erupt into a global war! Oh wait.

    2. I don’t think the bankers want a wide scale war. If you get nuked there goes all the profit. You have to bomb countries that have oil, then give them loans to rebuild and pay back in cheap oil.

      1. What Global Monopoly Finance Capitalists want is a Global government that they will control.

        These people have historically been big gamblers, willing to sacrifice short and medium term profits for long term, especially structural gains.

        Ordinary people have no knowledge of the state of the art of modern technologies of mass destruction, nuclear being just one and a very old one at that. These are state secrets everywhere.

        Many of those in power who do have knowledge as to who has what, (the Americans, Russians, Chinese etc.) have come to the opinion that a new war could be won on a first strike.

        There are others in power of course who disagree. That is why there are options.

  6. I’m kind of amazed about the number of people who talk about fracking is if they understand all the facets of the business. I am in the business and 95% of the people who write about it have no idea what they’re talking about.
    Fracking is possible and is profitable in some areas of North Dakota at $30 a barrel. The reason why a lot of it is shut down right now is because of overproduction and glut in storage. Once the price goes over $40 and $45 & the glut falls, drilling will resume. The cost of delivering oil from North Dakota is indeed much higher than it is from Oklahoma, Louisiana and Texas. Once the Dakota Access pipeline is in place that cost per barrel for delivery goes down exponentially. The often claimed price for crude oil to be profitable has been claimed at $70 or $80 a barrel – this assumes that there is one well on one pad with a pipeline attached to it. One way the cost is reduced is by having 3, 4, 8 or 10 Wells on one pad which is the new standard. Another thing to consider is sand delivery. Sand is used to keep the cracks, fissures open so as to allow the production water, and crude to flow back up to the surface once a well is fracked. Sand delivery is typically used with pneumatic tank trailers. That is slowly giving way to sand cubes and stackable sand storage which is considerably cheaper with much less manpower to frack a well.
    Another thing I keep hearing about is Iran is going to flood the market with oil.
    Well that would be really neat trick except a lot of these enery companies don’t want to go into a rabid Muslim country where they threaten to cut your head off and loan them billions of dollars to get their fields back on track at this price. Oil felds don’t flip on like a switch – they take years of planning, laying pipe, updating equipment to get their field back up and running.
    Another thing is the saudis are burning through billions of dollars to keep their people pacified and that is not going to go on much longer. Their sovereign wealth fund is going to dry out faster than anyone thinks.
    So instead of crying and whining about “it’s over and it’s never going to come back” let’s just be patient and wait and see what happens.

    1. I read wide ranging opinions with each claiming “rightness” based on “experience”. Which is right, who knows. Of course there have been improvements but it is an old technology for extracting difficult, expensive oil. Regardless, if it was so damn profitable, it would have been done long ago. It was only done when the really profitable oil was in drastic decline. In other words, we’ve moved a step down in productivity, profitability and availability. We’re after the “not so good stuff”.

      1. Expensive but getting much cheaper. The general idea of fracking has been around a while but the technology has improved much more than “a little bit.”

    2. The problem with your industry is that it doesn’t take into account for all the expenses as in water and air contamination. It’s the old saying privatize the profits and socialize the losses and the American public is beginning to catch on as our weather is beginning to show the effects of oil and gas use. Let’s face it your industry is on a short leash as alternative energy becomes less expensive. Take away all the tax breaks and cheap land plus the externalities and the party is coming to an end. The Kochs have become the 21st century Rockefellers and we are waking up to their new form of fascism, ALEC, which they call less government regulaton.

      1. Funny that oil shouldn’t have “tax breaks” that every other corporation is entitled to.
        As far as socializing losses – isn’t that Solyndra?

    3. The royal family is probably looking for a new home as we speak. My guess there will be chaos in the house of Saud soon. Iran will be the new Saudi Arabia.

    4. ‘ Once the price goes over $40 and $45 & the glut falls, drilling will resume.’

      Fine. But how do these operations pay their bills in the meantime ?

      1. Some won’t. If they borrowed up to their eyeballs and aren’t a diversified oil producer then they may go bankrupt.

  7. I don’t understand how a war would create a bubble. It seems to me that so much would be destroyed that it would cause a depression. After all, much of the world is already in a war. I’m not aware of any asset bubbles resulting from the wars in the ME, for example.

    1. The “bubble” is created when the OTHER SIDE’S stuff is destroyed and you have the only thing resembling an “economy” left. Like the US at the end of WW2.

  8. Fracking is a difficult topic because there are so many things about it that are rarely mentioned or analysed such as the technical and financial hurdles that have to be overcome to recommence utilisation of a hibernated well. China is more easy to read. The country is now setting sail to steer its manufacturing towards more consumer goods and technical products for their own and also for the export markets. If successful the strategy will limit the ability of the US and EU to sell to China. I presume that Germany will be hardest hit by that a few years down the road. All hopes to convert Germany into an economic powerhouse that could keep the rest of the EU above the waterline will fade away and the EU will finally break-up. The US will not benefit from that situation very much and tilt as well. China will be heavily damaged by its huge debts. By that time global debt will be too much to carry forward and the reset will finally set in. Given the speed with which everything happens in China that is probably another 5 years down the road. Enjoy the ride until then if you can.

Leave a Reply

Your email address will not be published. Required fields are marked *

Zero Fees Gold IRA

Contact Us

Send Us Your Video Links

Send us a message.
We value your feedback,
questions and advice.

Cut through the clutter and mainstream media noise. Get free, concise dispatches on vital news, videos and opinions. Delivered to Your email inbox daily. You’ll never miss a critical story, guaranteed.

This field is for validation purposes and should be left unchanged.