The FED’s easy money has encouraged rampant energy speculation and
over-investment, resulting in more than $500 billion in new loans and
investments in just the past 4 years. And so long as Crude prices stayed
comfortably above $90, investments made money and everyone was happy.
But once energy prices started falling, the decline quickly became a
negative loop-back effect because the very high levels of leverage could
not tolerate the move. Whenever asset prices fall in a highly levered
market, there is often a sudden lack of liquidity to absorb the
speculators’ need to unwind leverage, leading to desperation and fire
sales. In the case of energy, the sudden disappearance of “investors”
highlights just how speculative the underlying market had become.
It’s not exactly a Black Swan event, since Crude and other assets
occasionally move with incredible ferocity. But to a highly levered and
speculative population who chose to ignore the risks as being far too
improbable to worry about, it’s a situation where debt cannot be
offloaded at any reasonable price. At $55 bbl Crude prices, much of the
new debt simply does not work, meaning that significant energy company
junk bond defaults will occur. Although this is obviously bad for the
energy complex, it also has very real implications for broader systemic
risk.
(more)
Please share this article
No comments:
Post a Comment