Juggling Dynamite

At the age of 80, David Suzuki admits we’ve won some battles in the fight against climate change, but so far, we’ve lost the war. Still, the Canadian scientist and environmental activist says it’s not too late. In an interview with Bloomberg TV Canada’s Amanda Lang, Suzuki says we’re devastating the planet at the peril of future generations, and both women and a reformed Senate could be part of the solution to stop it.

Here is a direct video link.

The world’s largest fossil fuel companies, Exxon Shell, BP and Chevron have more than doubled their debt levels since oil prices turned down in 2014.

Unfortunately they have not borrowed to proactively reinvent themselves into cutting edge energy companies focused on a diverse range of smart, clean resources and technology–nope, these dinosaurs have borrowed to maintain antiquated operations, share buybacks and dividend payments to shareholders.

See Big Oil Companies Binge on Debt:

Here is madness that any small business owner could recognize:  the companies spent more than 100% of their profits on dividends last year.  Sound management?

This year, the problem got worse. In the April-June period, Exxon paid $3.2 billion in dividends and had just $1.7 billion in net income, according to S&P Global Market Intelligence. Shell paid $1.26 billion in interest in the first half of 2016, compared with $726 million in the same period a year earlier.

The c-suite says it’s confident they should be able to maintain current operations and dividend payments so long as the oil price stays between $50 and $55 a barrel next year.  There is no plan B.  And of course, none of these experts ever expect price declines.

As usual management has been incentivized to focus on boosting share prices and dividends rather than smart business operations, and are taking another page from the Kodak playbook. (see:  We’re paying CEO’s all wrong). No need to evolve or innovate or embrace the future, just maintain the status quo, keep borrowing and hope that price turns up before the companies go bankrupt. How much did you pay for that MBA diploma again?

Bond funds and managers desperate for income have been buying the debt to date, but it seems already highly exposed banks, are finally getting nervous and pulling back.  See:  Oil patch taps funds for credit as Canadian banks pull back.

At the end of the monetary magic road (we’re at the dead end), the economy needs structural reforms to grow.

These include breaking up of oligopolies and status quo preferences, jamming revolving doors between policy makers, regulators and corporations, closing tax loop holes, flattening the tax code, shifting of corporate incentives to ban share buybacks and boost wage growth, consumer debt write offs and restructuring, incentives to increase savings over borrowing, reduce the size of government, and target key infrastructure projects (along with spending cuts in other areas to pay from them, because as explained by Lacy Hunt in the Hoisington Q2 review–at present debt levels, further deficit spending has a negative GDP multiplier, resulting in lower GDP for each additional dollar of deficit spending).

Structural reforms require political consensus.  Indeed, even the much fantasized ‘helicopter money’ requires congressional approval.  With political campaigns raging in many countries this year, the likelihood of broad political action on structural reforms remains remote at present.

All of this sets up large opportunity for disappointment to hit presently delirious asset markets.  I suspect, only then, will political action materialize.  This clip offers a good summary of some key issues as finance gazers stare into the ‘Jackson hole’ this week.

A measure of global foreign-currency volatility matched its highest level in almost a month as traders speculated that Federal Reserve Chair Janet Yellen’s speech in two days may give clues on the path of U.S. interest rates. A gauge of the dollar held a three-day advance after futures traders priced in an increased probability of a rate increase by December. The Fed chief is slated to speak Friday at the annual monetary-policy symposium in Jackson Hole, Wyoming. Bloomberg View’s Mark Gilbert and World Economic Forum Head of Global Competitiveness Margareta Drzeniek-Hanouz. Here is a direct video link.