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Share the Wealth – May 22, 2018

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Registered Investment Adviser Caleb Lawrence 

The major averages couldn’t hold their early gains and enter the final hour about even on little real news. Trump’s tough talk on trade is rapidly devolving into another exercise in mugging for the cameras as there is little tangible benefit to be seen so far.

The Richmond Fed regional index jumped 19 points in May on strength in new orders and employment, capital spending plans slipped for a second month.

As is well known, the previous financial crisis circa 2007-2009 was caused by reckless mortgage lending and particularly sub-prime lending that led to an unsustainable real estate price bubble, and an unprecedented boom for an industry predicated on unreasonable expectations. Fast forward to the present and the fracked oil and gas industry, or shale if you prefer. Is well on its way to its own debt fueled day of reckoning compliments of nearly a decade of negative free cash flow regardless of oil at $40 a barrel or $100, brought on by a need to drill ever more wells to sustain production in the face of rapidly declining existing production. It is actually fairly accurate at this point to describe the fracked energy business as a Ponzi scheme due to the very high existing debt levels and the proclivity of the major players to borrow more money to pay off existing debts as they still can’t make a profit. The math dictates that at some point fairly soon this entire industry will drown in debt. Just like the failure of real estate during the previous crisis. Let’s hope it doesn’t take the entire economy with it.


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