The crash of 2015 has been paused temporarily by a curious circumstance: a brawl among the financial scavengers who by now should have carted away the body parts of the great American fracking boom. Against all logic, financial vultures are fighting with financial jackals for possession of the corpse, and while doing so are pumping transfusions into it even though decomposition is already well under way. Here’s what’s happening:
The Vultures believe the decline of American oil fracking is only temporary, a product of the sudden decline in oil prices that struck last fall, and that with the inevitable return to $100-a-barrel oil, the frackers will return to profitability. Now, this is a curious thing to believe when it is easily determined that the companies involved have had negative cash flows since the very beginning of their revolution, even at $100 a barrel. Nevertheless, the Vultures believe in their scenario so fervently that they have been amassing cash with which to buy up prostrate frackers at the bottom of the market and thus make billions as the market rises, phoenix-like, back to the skies. Private equity firms such as Blackstone, Carlyle Group, Apollo, and KKR, for example, have raised about $30 billion and are just waiting to see the floor to begin their coup. But where’s the floor?
Funny story about that. The Hyenas have a similar strategy but are using different tactics. They are the ones transfusing the corpse with fresh money, buying up junk bonds and penny stocks by the dump truck load so they will be in position for the resurrection — not because they have bought the company but because they have bought into it. Their injections are keeping the corpses alive enough that they are still twitching: the death certificate cannot be signed, and the Vultures cannot land. It’s a scavenger standoff.
This is yet another unforeseen consequence of two serious infections afflicting our financial system (leaving aside, for the moment, the ailments of the fracking boom). One sickness is the enormous amount of cash, the largely unearned wealth of the two per cent, sloshing around in the frantic hands of managers under orders to do something with it, make the clients some decent return on investment, you know, like 20%. The other is the cold dead hand of the Federal Reserve, holding interest rates for all safe investments to around one per cent, forcing the frantic to take their money to a casino somewhere and risk it all in search of the legendary 20%.
The stock-market casino is on fire and it looks like the roof is going to come down any day now, so they’re not going there. They’ve already blown up the housing market, and pretty well saturated the subprime auto-loan bonanza, and have bought up a gazillion foreclosure houses to rent out (and in the process have found out just how much it sucks being a landlord). “Over here!” someone yelled a few months ago, “I found 12%!” And the stampede was on, leading to the current contretemps between buzzards and hyenas.
But the zombie companies that have lured them in to the feast are, in fact, still dead. Bloomberg reports that half of the 41 fracking companies now doing business in the United States will be gone by year’s end. And that Schlumberger Ltd., the world’s largest oilfield services provider, will lay off 11,000 people, the second largest downsizing since the oil-price crisis began (the largest? Schlumberger’s elimination of 9,000 jobs in January). Rig counts are dropping and so is production.
The dispute between the vultures and the hyenas does not make the corpse they are contesting more valuable. It simply delays the disposition of the remains and the resumption of the Crash of 2015. For maybe a week.