FCX is being priced like it may go bankrupt. Credit lines can evaporate overnight, and 20 Billion in debt is a huge liability in an environment of commodity deflation. Who will buy their assets?
If you look at the drop in percentage terms it is no where near the worst in history. At the current record index levels it would take much larger point drops to equal the percentages of previous historic drops.
The debt burden of college graduates will be the next sub-prime debacle to hit the lenders. Right behind that, or perhaps at the same time, is the huge sub-prime lending used to inflate car sales in the US. The lending going on for cars is at least as egregious as that of the the sub-prime lending for mortgages that occurred leading up to the financial crisis in 2008. Both of these lending bubbles will come back to haunt an already weak economy. The question is, what institutions and lending entities that have been used by car companies and Sallie-Mae are most exposed to this impending debt default? What ripple effects will these debt defaults have on the markets and the economy?
Notice there was also a large divergence in 1999. Those of us in the high tech business will never forget the blood-in-the-streets in 2000. Many people I knew lost most of their money and their jobs. It was catastrophic for many companies and investors.
Great article as usual. I enjoy your writing style as much as the content.
Even though oil prices are dropping, why does US oil production stay firm and why have oil rig counts stopped falling? I think the answer is that the oil producers have huge debts to service and they need the revenue to make the interest payments.
If oil drops low enough, oil producers will start to miss payments, default on bonds. and be forced into bankruptcy. Only then will we see a temporary drop in oil production as assets move from the weak hands to the stronger hands.
But as you pointed out, this will be quite painful for the companies, their workers, the bond holders, the banks and the communities that feed off the oil industry.
I think the wildcard in all this is how well the financial system will be able to handle the bond defaults. In 2008 the defaults on bonds based on worthless sub-prime mortgages almost caused the entire financial system to collapse.
The question is, what is the magnitude of impending bond defaults from the failing oil companies? You state that it is 1 trillion in loans, and 50 billion in bonds or 14% of last year's total junk bond market through October. But what is the total size of the bonds and loans issued to oil companies at risk of default? Is it as great as the sub-prime debacle that nearly caused a systemic collapse? How can we even know the magnitude of the impending bond defaults when they have been repackaged and sold to bond funds? In addition,what is the magnitude of the derivatives that have been generated off of those junk bonds?
Could the US oil company implosion equal the magnitude of the 2008 sub-prime mortgage melt-down? This is where more digging needs to be done, and soon.
The huge risk that investors are ignoring is that bond liquidity is drying up, and the world has $500 Trillion in CDS derivatives that have no chance of surviving a huge bond crisis. The pressure on bonds is building up to the breaking point. Who will buy these bonds when you are guaranteed a loss? With energy collapsing, who will buy the energy company bonds? And who will buy the PIIGS bonds, the Puerto Rico bonds, or any government bonds for that matter?
A huge amount of money is trapped in bonds with no exit. The market believes that the central banks will be able to be the buyer of last resort for bonds ad infinitum. But even if they can, what does that imply for their currencies when they are under-pinned by a constantly falling asset base of collapsing bonds?
Market risk is now higher than at any time since the 2008 crisis. If the bond market can't be propped up by the central banks, the crisis would dwarf the 2008 bond collapse.
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Freeport-McMoRan Just Bottomed
FCX is being priced like it may go bankrupt. Credit lines can evaporate overnight, and 20 Billion in debt is a huge liability in an environment of commodity deflation. Who will buy their assets?
This 2 Day Stock Market Crash Was Larger Than Any 1 Day Stock Market Crash In U.S. History
If you look at the drop in percentage terms it is no where near the worst in history. At the current record index levels it would take much larger point drops to equal the percentages of previous historic drops.
Outside The Box: Another Day Younger And Deeper In Debt
The debt burden of college graduates will be the next sub-prime debacle to hit the lenders. Right behind that, or perhaps at the same time, is the huge sub-prime lending used to inflate car sales in the US. The lending going on for cars is at least as egregious as that of the the sub-prime lending for mortgages that occurred leading up to the financial crisis in 2008. Both of these lending bubbles will come back to haunt an already weak economy. The question is, what institutions and lending entities that have been used by car companies and Sallie-Mae are most exposed to this impending debt default? What ripple effects will these debt defaults have on the markets and the economy?
Chart Of The Day: Epic Divergence Between Commodities And Stocks
Notice there was also a large divergence in 1999. Those of us in the high tech business will never forget the blood-in-the-streets in 2000. Many people I knew lost most of their money and their jobs. It was catastrophic for many companies and investors.
Deducing The Crash In Oil: How Would Sherlock Holmes Drill Beneath The Headlines?
Great article as usual. I enjoy your writing style as much as the content.
Even though oil prices are dropping, why does US oil production stay firm and why have oil rig counts stopped falling? I think the answer is that the oil producers have huge debts to service and they need the revenue to make the interest payments.
If oil drops low enough, oil producers will start to miss payments, default on bonds. and be forced into bankruptcy. Only then will we see a temporary drop in oil production as assets move from the weak hands to the stronger hands.
But as you pointed out, this will be quite painful for the companies, their workers, the bond holders, the banks and the communities that feed off the oil industry.
I think the wildcard in all this is how well the financial system will be able to handle the bond defaults. In 2008 the defaults on bonds based on worthless sub-prime mortgages almost caused the entire financial system to collapse.
The question is, what is the magnitude of impending bond defaults from the failing oil companies? You state that it is 1 trillion in loans, and 50 billion in bonds or 14% of last year's total junk bond market through October. But what is the total size of the bonds and loans issued to oil companies at risk of default? Is it as great as the sub-prime debacle that nearly caused a systemic collapse? How can we even know the magnitude of the impending bond defaults when they have been repackaged and sold to bond funds? In addition,what is the magnitude of the derivatives that have been generated off of those junk bonds?
Could the US oil company implosion equal the magnitude of the 2008 sub-prime mortgage melt-down? This is where more digging needs to be done, and soon.
Regards,
BDF_NYC
It Is Not Priced-In. That’s Been The Real Stupid Trade All Along
The huge risk that investors are ignoring is that bond liquidity is drying up, and the world has $500 Trillion in CDS derivatives that have no chance of surviving a huge bond crisis. The pressure on bonds is building up to the breaking point. Who will buy these bonds when you are guaranteed a loss? With energy collapsing, who will buy the energy company bonds? And who will buy the PIIGS bonds, the Puerto Rico bonds, or any government bonds for that matter?
A huge amount of money is trapped in bonds with no exit. The market believes that the central banks will be able to be the buyer of last resort for bonds ad infinitum. But even if they can, what does that imply for their currencies when they are under-pinned by a constantly falling asset base of collapsing bonds?
Market risk is now higher than at any time since the 2008 crisis. If the bond market can't be propped up by the central banks, the crisis would dwarf the 2008 bond collapse.