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Lee Adler Tells Lindsay Williams What Went Wrong This Year and What to Look for in 2015

Lindsay Williams of South Africa’s Fine Business Radio and CNBC Africa asked me to review 2014 in a nutshell and look ahead to next year. As for this year, apparently hedge funds forgot the two oldest rules in the book. And next year the Fed and ECB will face big problems in trying to continue to rig the markets and interest rates.

I misspoke on the crude futures positions. Specs record long, not short. Producers were record short, but the capital destruction occurred because large specs were record long. That contributed to the closing of those 400 hedge funds.

Listen here or the player below.

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If energy prices remain near current levels, Canada’s economy is in trouble

Oil & Gas rig count

And so it begins… Collapsing crude prices are starting to make their way through the North American energy sector, as the most unprofitable oil & gas rigs are mothballed. Those flashing red numbers are not just on your screen any more.

Source: Baker Hughes

The closures have been particularly acute in Canada, where some 40 oil & gas rigs have been taken out of operation recently. In fact it’s not clear if economists fully appreciate what’s about to transpire with the Canadian economy. This decline in rig count is just the beginning.

Consider for example the situation with the Canadian oil sands – one of the more expensive sources of crude production. Even if prices recover somewhat, oil sands production will be winding down – nobody wants to operate money-losing businesses for a prolonged period. And those who believe crude will be back above $80/bl any time soon is deluding themselves.

Source: FT

Up until now, production from oil sands has fueled growth in other sectors, including for example transportation and housing in Alberta. This is about come to a screeching halt.

Alberta housing situation (source: Alberta Treasury Board and Finance)

The national situation is not significantly better. Housing markets across the country have continued to rally, even as homes south of the border had undergone an unprecedented price adjustment. While many point out that the reason for avoiding a US-style housing crash has been a stronger mortgage market, that’s only part of it. The global commodity boom in which Canada successfully participated is the main reason.

Source: Multiple Listing Service

Now as the commodity super-cycle has ended and energy prices collapsed, Canadian households are caught with near-record levels of leverage.

Source: National Post

Some have been pointing out that Canadian mortgage debt service ratio has continued to improve. However that measure is misleading, as it excludes principal payments. In reality the situation is much worse (see chart, h/t @ac_eco).

There is also the argument that Canada’s economy is “diversified”. Perhaps. But just to put the situation in perspective, take a look at the breakdown of the nation’s trade balances.

Source: @Earthed ,  Maclean’s

While economists will attempt to analyze the impact of energy prices on various sectors separately, when it comes to Canada, a number of economic components are quite difficult to decouple from one another. What’s clear is that this exposure to energy is going to damage the labor markets, squeezing the nation’s overextended households. And the knock-on effect won’t be limited to a severe slowdown in residential construction growth. Consider for example the expenditures on renovations – something that’s been supporting parts of manufacturing and other sectors. This is not going to end well.

Source: Scotiabank

The markets are already sensing the contagion effect from energy on the housing market, as Canadian property REITs take a hit. If oil prices remain anywhere near the current levels for a prolonged period – something the Saudis are aiming for (see post) – Canada’s economy is in serious trouble.

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Following Up: The Mainstream Media Remains in Denial on Trade Policy and the Middle Class’ Woes

Two Fridays ago, I expressed the hope that the Washington Post‘s big new series on the decline of the American middle class would deal realistically with the impact of decades of trade policy decisions. The reason should be obvious – these decisions have undermined employment and wages in the U.S. manufacturing sector, which both dominates the nation’s trade flows and boasts an unrivaled record of enabling working class Americans to lead middle class lives.

Weekly Market Summary

RUT

Last week ended with extremes in equities, treasuries and volatility. That combination, together with positives in seasonality, were the primary catalysts for a positive week in the markets (post). But the gains this week were well beyond anyone’s expe…

The Keynesian PhD Brigade Strikes Again: Sweden’s Riksbank Joins The ZIRP Mania

fredgraph

  Folks, it’s a tyranny of the PhDs. Recently, the central bank of Sweden was subject to a withering tirade by that oracle of Keynesian rubbish, professor Paul Krugman, who accused it of “sado-monetarism” for leaving the Swedish economy exposed to the mythical economic disease of “deflation”. So the Riksbank threw caution to the wind, and…