We interrupt the Crash of 2015 for a brief word from some people who are not participating, on the belief that the oil boat — having been hit by two icebergs, dwindling resources and plunging prices — is not sinking, it is merely bobbing in a trough between two lovely crests. We will return to the previously scheduled sinking as soon as these folks discover once again that no matter how much stupidity and cash you pump into a ship with an enormous hole in the hull, you can’t save it.
I have been waiting since mid-April for the next phase of the fracking disaster to kick in, when producers unable to raise new debt or capital in the face of collapsed prices and devalued assets would drop like flies, production in the fracking patch would decline sharply, the junk bond market would crash and burn, possibly taking the regular bond and stock markets with it. Seemed like a slam dunk. Why hasn’t it happened?
The first evidence to come to my attention appeared this morning in The Wall Street Journal — “Easy Access to Money Keeps U.S. Oil Pumping” — and Forbes — “What Is The ‘Smart Money’ Telling Us About Oil?” Incredibly, the “dumb money” — and that is the term used by the Forbes contributor, Jesse Colombo — is still betting that oil prices are going to rebound soon and everything will be the way it was.
But wait. The way it was, back in the summer of ‘14, when oil was selling for more than $100 a barrel, was that the frackers were losing their shirts. Oh, they were showing nice operating profits per well, and paying dividends and all, but the horrendous decline rate of production from fracked wells, up to 60-70% in the first year, 90% in three years, meant that every $8 million well had to be replaced in about three years to keep the company going. The expense of doing that was far more than the operating profits, so the actual; cash flow of virtually all the producers was negative from the start.
They sold all the stock they could sell, and issued all the bonds, and borrowed all they could, and then issued junk bonds until that market seized up, until it seemd they had nowhere left to go but down. But we underestimated the incredible dumbness of dumb money.
In the words of the Wall Street Journal (which will never use the words dumb and money in the same phrase), “banks, private-equity firms and institutional investors have continued to pour money into the sector even as oil companies slashed billions of dollars in spending from their budgets and laid off more than 100,000 workers.”
They’re buying stock! In fracking companies! $16.69 billion worth just in the first quarter of 2015! And they’re secondary equities!
I’m sorry. Was I shouting?
What happened with all that debt that went sour at the end of the first quarter, when required assessment of oilfield reserves had to be done at the new lower prices? Reports the WSJ: “Loan officers surveyed by the Federal Reserve in April said they expect an increase in energy companies unable to pay back their loans, and were preparing by restructuring agreements.” Many of those restructured agreements involved new, second-lien loans.”
I know. I’m shouting again.
These enormous quantities of money, sloshing around the world like tsunamis in search of more wealth, blowing up and sweeping away whatever shore they land on, are propping up the zombie oil patch and delaying the inevitable.
Lest you think this is an exaggerated example, not typical of the incredible dumbness of money, consider one more craze sweeping today’s financial world. P2P loans are expanding exponentially since Wall Street geniuses began collateralizing them. What are P2P loans? Private loans to people whose high-interest credit cards are maxed out, allowing them to repay (cough,cough) the debt at lower interest rates and of course to go back to using the credit card. That’s what we did with home re-fi 10 years ago and look how well that worked out.
P2P loan volume is poised to hit $77 billion this year, a 15-fold increase from just three years ago. LendingClub, the No. 1 player worldwide, is trading at a market value of about $7 billion even though it lost $33 million last year.
You can’t make this stuff up. And you can’t predict how it’s going to play out because where there is no rationality, well, there is no rationality.
So in a few minutes, weeks or months, we will return you to the Crash of 2015, already in progress.