So you’ve heard of Big Tobacco…
Big Oil…
Big Pharma…
Big Tech…
But what about Big Loo Roll?
If anybody’s making a mint from the pandemic panic, it’s the toilet paper manufacturers.
The Australians are eating each other over Andrex. I was at a coffee shop close by a Sainsbury’s yesterday, and pretty much all the shoppers who passed were loading up on great bales of the stuff.
In a pandemic scare, it appears a licence to print loo roll is a licence to print money.
But as gold investor Ned Naylor-Leyland says reassuringly:
Don’t worry about not having enough toilet roll. Your fiat will come in handy & in due course there will be no shortage of it.
We’ll come back to that incendiary prediction in a moment. For while I was counting toilet roll over coffee, the wings of a new Black Swan were beating overhead…
Black Swans of a feather wreck oil together
The oil industry has seen better days. Its main customer, China, just caught WuFlu, significantly reducing demand.
Russia has now taken the opportunity of already low prices to pound the weaklings in the market to death, beginning a price war with Saudi Arabia; a competition to pump and dump as much oil on to the market as possible and crash the oil price even lower. Only those in the industry with the strongest pain tolerance will survive, Mr Bond.
It ain’t looking good for the nightlife in Aberdeen. But it’s looking even worse for “the boys in Texas” with their fracking rigs, who require a much higher oil price than the Russians, let alone the Saudis, to stay in business. It’s the disruptive fracking companies which Russia is targeting in order to retain its dominant position in the global energy market.
This may all seem very far away, more like a plot device in a James Bond film than anything else, but there will be ever more collateral damage in the global marketplace if Russia succeeds in cracking open the frackers.
Due to the high cost of fracking, the companies that have engaged in it have borrowed in the hundreds of billions of dollars to expand and maintain their operations. Banks and investors alike have exposed themselves significantly to the fracking revolution, by purchasing junk bonds the companies issue to keep them afloat (junk bonds are risky debts from companies with a low credit score).
Now, the coronavirus shock has seen the highest rate of investors dumping investment-grade and junk debt since 2011 already. The Russia/Saudi price war will only push investors to dump more of their debt, and restrict financing for the companies even further. Keep the oil price low enough, and bankruptcies are on the table. (The recent exodus from junk debt caused by corona is striking other industries too, but we’ll explore that tomorrow.)
Chesapeake Energy Corporation ($CHK) is one of the frackers under significant strain. The stock was hit 75 bucks in the noughties – now it’s trading at 22 cents.
Investors have dumped its debt to such a degree that if a brave investor buys it up on the cheap now and the company stays solvent, they’ll earn 27% interest.
Of particular note are the smaller regional banks in the States who have exposed themselves heavily to the sector, and may go bust if the frackers fail to pay up, putting everybody else who lent them money at risk. Bailouts or emergency mergers are administered if the risk is detected early enough. Financial risk contagion occurs if they aren’t…
This may be seen as a Black Swan in the fullness of time – an external shock occurring at a time of particular weakness that pushes financial stability over the edge, with far reaching negative impacts that can’t be comprehended before we see them occur. It’s yet another indicator that we may have arrived at “The End”. For a comprehensive guide to navigating this scenario, and knowing
Our energy expert James Allen has been highlighting this as a significant risk to the energy market for some time, predicting a bust in what he calls “sub-prime oil”. Will the Russia/Saudi price war be the (black) swansong of the fracking industry that will trigger the bust? I’ll need to ask him about this new oil war when he arrives in the office…
Coronavirus, gateway drug virus for government
“Stimulus” injections in the Western world following the financial crisis have so far really only been one flavour: monetary.
By this, I mean they’ve all originated from one side of the state: central banks. Across the developed world, “stimulus” has just meant that central banks have reduced interest rates, or printed money to buy financial assets and raise their price. This has not succeeded in bringing economic growth back to its pre-crisis levels to say the least.
But more liquidity in the banking system does not restart the wheels of commerce which have been halted in fear. To put it more bluntly, adding more zeros on to a bank’s balance sheet does not inspire anybody to buy a home or get a new car. What it does is create gross distortions in asset prices, filling markets with a form of financial nitroglycerine which will detonate
This attempt to create economic activity by creating vast amounts of credit has been further hobbled by another appendage of the state: the financial regulator.
Trying to make up for its failures after the crisis, regulators came out swinging and placed significant constrictions on how all this new credit could even be used, further distorting where all the money ended up going. (Ben Bernanke himself, the arch central banker in charge of the Federal Reserve during and after the financial crisis, couldn’t get a mortgage after it for all his control over the global financial system.)
I believe what the coronavirus will do is bring about the “other” kind of stimulus governments can bring about: fiscal, or more simply, spending a boatload of money, whether they can afford it or not.
Some governments and some political entities have been dying to do this for years, held back by either the political opponents, the electorate, or in the case of the eurozone, the currency union’s own rules. The coronavirus and the threat it poses to the economy (be it in losses of tax revenue, productivity, earnings – not to mention the general health of the population), provides the excuse to override all of those barriers.
We are already seeing the virus being used as an argument for bank bailouts in Italy. Christine Lagarde may well use this as an opportunity to print as much money as possible to cement the cracks that have formed in the eurozone, be they related to the coronavirus or not.
The coronavirus will be a gateway drug, indeed a “gateway virus” for governments to engage in fiscal stimulus programmes. Want it or not, those in charge will be forced to take a hit of fiscal stimulus to counter the corona threat. And chances are, they’ll like it so much they’ll develop an appetite for the harder stuff: nationwide infrastructure programmes, helicopter money, even universal basic income perhaps.
I think that’s what Naylor-Leyland was getting at, with the whole “fiat toilet roll” thing.
And I don’t think I’m alone in anticipating this. 21,007 kg of gold was added to the world’s largest gold ETF, the $GLD, on Friday. That’s 2.6 million sovereigns’ worth. When states go for the “hard stuff” in their stimulus efforts, investors go for the hard money stuff in their portfolios.
All the best,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates