Juggling Dynamite

With West Texas Crude under $47 this morning (West Cdn Select around $35), we must keep in mind the $10 to $40 range (green band below) where oil prices traded before the consumer credit bubble billowed them to anomalous heights from 2004-2008 (see my partner’s chart here.)

We should also understand how overly concentrated and dependent many economies have become on the oil and gas sector the past decade. Mean reversion in the space now, will have a negative impact far and wide, even while lower prices are better for consumers (reducing their expenses and allowing them to pay down debt faster than they could with higher energy costs).

Fadel Gheit, analyst at Oppenheimer & Co., examines the potential impact of cheap oil over a long-term timeframe on economics and oil producers. Here is a direct video link.

In their minds the theory is perfect. In practice their perpetual add-debt-and stir policies have proved devastating for the real economy. Widely revered and misguided, financial academics have served as maniacal pied pipers leading the masses and their governments to fiancial ruin the past 15 years. And while the academics will deservedly lose reputation after the fact, the rest of the world will be left to pay the costs for years to come.

When the central bank was incremental in normalizing rates 10 years ago during a time of enormous froth in the housing, equity and credit markets, it led to huge distortions in the real economy.

“Finally, when the bubbles popped the whole house of cards came down.”

The Fed still hasn’t learned its lesson.

“[It] doesn’t appreciate the precedent of what they put the world through a decade ago and I fear they’re doing it again.”

Here is a direct video link.

We drove by a new high end shopping complex over the holidays that had been finished in 2011 with many of the well known brand names in house.  The place looked very prosperous.  Except that there were no visible people coming in or out.

In their place, the mall had staged the entrances with a number of smiling cardboard cutouts of people carrying bags from the various stores. We took some pictures (see left). It was eerie.  Reminded us of this scene from ‘I am Legend’.

Insanely overbuilt in the credit bubble, the world is now awash with impossible amounts of retailers and retail space that is only just beginning to close.  More announcements on this theme today:

On Thursday, J.C. Penney said that it will close 40 of its locations—about 4 percent of its stores—this year. Then Macy’s said it would close 14 stores in early spring. The announcements came one day after teen retailer Wet Seal said it will shutter about two-thirds of its 500-plus stores, and a bankruptcy judge in Delaware ruled that Deb Shops can shut down nearly 300 stores as part of its liquidation.

These are far from the only retailers whittling down their square footage.  See:  Retailers are closing up shop

The tricky bit is to figure out what can be done with what will be a mounting pile of empty buildings. Since most places also have far too many housing and commercial office units, it is not likely that a refit to these alternates will make sense in many cases. The most realistic course may actually be to bring in the repo companies and literally take down and recycle the parts and constituent commodities (more supply to swamp already excess inventory).  In other instances, perhaps a switch over to fitness complexes, manufacturing, hydroponic growing or alternative energy operations may work.

One of the biggest growth areas for jobs in the next few years may well be in the reclamation and restoration business. Companies and workers will be needed to retrofit and take apart the excesses of the credit bubble in order to restore more useable green space, forests and growing areas. Sounds like progress.