THE SUBPRIME U.S. ECONOMY: Disintegrating Due To Subprime Auto, Housing, Bond & Energy Debt

The U.S. financial system continues to disintegrate even though most Americans hardly notice.  The system is being gutted from the inside out… much the same way a chronic disease weakens a patient even before any symptoms are felt.  However, we are already experiencing painful symptoms as U.S. economic indicators continue to weaken.

Here are just a few of the recent headlines:

Energy Giant Schlumberger Fires Another 8,000 As “Market Conditions Worsen” in Q2

The Financial System Is Breaking Down At An Unimaginable Pace

Potential Crisis Triggers Continue To Pile Up In 2016

Just In Time—–Big Wall Street Housing Investors Cashing-Out On Housing Bubble 2.0

Corporate Bond Defaults Hit Highest Rate Since Financial Crisis

These are just some of the recent headlines pointing to BIG TROUBLE AHEAD.  However, the U.S. financial system is in dire shape due to the SUBPRIMING of the entire economy.  Today, anyone can purchase a car for little or nothing down and finance it for 84 months.  The U.S. housing market is also in the same predicament.

According to the article, Are We Heading for Another Housing Crisis?, published on May 12th this year:

While the economy and home prices have both rebounded, some people have expressed concern we are headed for a repeat housing bubble. As of January 2016, home prices were rising at a rate twice that of inflation, according to the S&P/Case-Shiller U.S. National Home Price Index.

What’s more, Fannie Mae and Freddie Mac have unveiled programs to allow first-time homebuyers to make a purchase with only 3 percent down. Plus, some lenders are using alternate credit scores, which may make loans available to those who can’t get one under conventional credit scoring methods.

So, here we are heading down the same path as we did prior to the 2008 U.S. Investment Banking and Housing collapse.  However, this time around its both a Subprime Auto & Housing problem.  But, that is just part of the Subprime mess.

As most of you already know, many of the world’s sovereign bonds have negative yields.  According to the article, The Financial System Is Breaking Down At An Unimaginable Pace:

In February 2015, the total amount of negative-yielding debt in the world was ‘only’ $3.6 trillion.

A year later in February 2016 it had nearly doubled to $7 trillion.

Now, just five months later, it has nearly doubled again to $13 trillion, up from $11.7 trillion just over two weeks ago.

Think about that: the total sum of negative-yielding debt in the world has increased in the last sixteen days alone by an amount that’s larger than the entire GDP of Russia.

Just like subprime mortgage bonds from ten years ago, these bonds are also toxic securities, since many of are issued by bankrupt governments (like Japan).

Instead of paying subprime home buyers to borrow money, investors are now paying subprime governments.

And just like the build-up to the 2008 subprime crisis, investors are snapping up today’s subprime bonds with frightening enthusiasm.

To see total world negative-yielding debt doubling to $13 trillion in just the past six months is a BLINKING RED LIGHT.

So, not only do we have Subprime Auto & Housing… we also have to include Subprime Govt Bonds.  While U.S. Treasuries and bonds are not yet negative-yielding, I believe it is just a matter of time.

As we can see, the U.S. is now becoming a massive SUBPRIME ECONOMY.  Unfortunately, it gets much worse.  The factor that most analysts have not yet factored into the subprime disaster is energy.

I would like to remind my readers and new followers that it takes energy to run the Auto, Housing & Bond markets.  Yes, it takes the burning of energy to allow the global bond markets to function.  Basically, Treasuries and Bonds are nothing more than claims on future economic activity.  My sympathy goes out to anyone holding onto 20-30 year bonds until maturity.  I highly doubt these bonds will ever make it to maturity.

That being said, let’s look at the catastrophe taking place in the U.S. Subprime Energy Industry.

U.S. Shale Oil Companies Saddled With Debt Up To Their Eyeballs

I discussed the big trouble with the U.S. Shale Energy Industry in my recent interview with Dan at Future Money Trends.  If you haven’t yet checked it out, I highly recommend it:

During the interview I spoke about the following chart below.  These are some of the top U.S. Shale oil companies.  I included Chevron, not because it is a large shale oil producer, but because it is one of the three major oil companies in the United States:

U.S.-Shale-Oil-Companies-Long-Term-Debt

In 2006, these seven U.S. oil companies held $17.2 billion in combined long-term debt.  However, by 2015… this ballooned to $72.1 billion.  Basically, their debt increased four times in a decade.  Now, the interesting thing to understand about this chart is that their long-term debt really started to increase in 2011.  Why is this significant?

Because, the price of U.S. oil (West Texas Crude) was nearly $100 for 2011, 2012 and 2013.  Which means, the high oil price did nothing to help these companies pay down their debt.  Rather, their long-term debt more than doubled in just the past four years.

I hope anyone reading this will realize, SHALE OIL IS SUBPRIME ENERGY that really wasn’t economic unless we had zero interest rates and monetary printing.  Even though the U.S. Shale Oil Industry brought on a lot of oil in the past decade, they really didn’t make any money… they just saddled their balance sheets with debt.

Let’s take a look at the most recent data from the top four shale oil fields in the United States.  According to the U.S. EIA Drilling Productivity Report released on July 18, the Bakken and Eagle Ford shale oil fields are estimated to suffer large declines in August:

Bakken-July-2016-DPR-Chart

Eagle-Ford-July-2016-DPR-Chart

The EIA forecasts that the Bakken and Eagle Ford will lose 80,000 barrels per day in just August.  These are BIG NUMBERS.  If we look at the actual production figures for the top four shale oil fields, here is the result:

Top-4-Shale-Oil-Fields-Production-AUG-2016

Oil production from the top four shale oil fields has declined 914,000 barrels per day (bd) since the peak in March 2015.  This translates to a 17% decline in oil production from these four fields in just 16 months.  However, the impact on the U.S. economy is even worse when we look at the figures on a monthly and annual basis.

This next chart shows the combined loss of oil production from these top four shale oil fields based upon the minimum production from Nov 2014 to Nov 2015.  Let me explain.  In Nov 2014, these shale fields produced 5,027,000 bd, peaked in March 2015 at 5,304,000 bd and then fell back to 5,106,000 bd in Nov 2015.  So between Nov 2014 & Nov 2015, these fields produced a minimum of 5,067,000 barrels per day.

In August, the Bakken, Eagle Ford, Niobrara & Permian oil fields will be producing approximately 4,390,000 barrels per day.  This is a 676,000 barrel per day decline from the minimum production these four fields produced for a year during that Nov 2014-2015 time period.

The reason why I decided to do it this way is to show that these four fields produced at least 5,067,000 barrels per day for an entire year.  To show the decline from the high peak is disingenuous because it was only for a brief one month period.  This means, these top four fields will lose 20.3 million barrels of oil in a month and a stunning 247 million barrels in a year:

Top-4-Shale-Oil-Fields-Production-Loss

However, it will be much worse than this going forward as U.S. Shale oil production continues to decline.  How bad will it be?  Well, if these companies received $50 a barrel for oil, it turns out to be a loss of $13.7 billion in a year.  But, as I stated, it will be worse as oil production continues to decline.

I published this chart in a previous article, but it’s important to see again:

U.S.-Energy-Sector-Interest-Payments-On-Debt-%

The U.S. Energy Sector is saddled with $370 billion in debt.  In 2015, the U.S. Energy Sector paid 48% of their operating profits just to pay the interest on their debt.  This ballooned to 86% in Q1 2016 when the oil price fell to $33.  If the oil price remains between $40-$50, the U.S. Energy Sector will likely have to fork out 60-70% of its operating income just to service its debt in 2016.

And of course… IT’S EVEN WORSE THAN THAT… LOL.  We must remember, for most of 2015, the top shale oil fields were producing 676,000 barrels per day more than they will be this year.  Thus, they will have less revenues due to falling oil production.

So, the billion dollar question is this… how will the U.S. Energy Sector survive with low oil prices and falling production???

Welcome to SUBPRIME USA.

Unfortunately, the coming collapse of the U.S. economic and financial system will be orders of magnitude greater than what took place in 2008.  Why?  Because we just had a subprime housing market in 2008, whereas the entire U.S. economy today is SUBPRIME….  Subprime Auto, Housing, Bonds & Energy.

Lastly, while some precious metals investors have become a bit frustrated by the low gold and silver prices or the ongoing manipulation of the markets by the Fed and Central Banks, the current system is not sustainable.  The doubling of world debt with negative yielding debt in the past six months is a bad sign indeed.

Owning physical gold and silver will provide a lot more options during the next economic and financial collapse than most of the paper assets 99% of the world is invested.

IMPORTANT NOTICE:  Here is the link to register for the SRSrocco Report Precious Metals Webinar taking place on Tuesday, August 2nd at 6 pm EST – Eastern Standard Time:

SIGNUP For SRSrocco Precious Metals Webinar

Check back for new articles and updates at the SRSrocco Report.  You can also follow us at Twitter, Facebook and Youtube below:

Enter your email address to receive updates each time we publish new content.

I hope that you find SRSroccoReport.com useful. Please, consider contributing to help the site remain public. All donations are processed 100% securely by PayPal. Thank you, Steve

26 Comments on "THE SUBPRIME U.S. ECONOMY: Disintegrating Due To Subprime Auto, Housing, Bond & Energy Debt"

  1. Steve,

    Shale oil profile seems to be a miniaturization of global petroleum production. Smaller in scope and shorter in time.

    What will be it’s impact on the global picture? Will the dramatic drop off have any significant effect on global pricing or will it only be like the Nigerian and Canadian interruptions?

    Thanks,

    SteveW

    • Steve W,

      I don’t see oil prices rising above $70 for quite some time, if ever. Art Berman wrote an article on this which I highly recommend everyone reading: http://www.artberman.com/oil-prices-lower-forever-hard-times-in-a-failing-global-economy/

      There is just way too much debt now in the system. I believe U.S. and world economies will continue to contract, thus pushing demand lower. This will keep oil prices subdued. This is not good for the oil producers ALL OVER THE WORLD.

      steve

      • Good Article. Very concise history.

        Maybe this will create real opportunities for entrepreneurial stackers when the SHTF. Only people with real money will be able to buy petroleum products at a low price and make things happen.

        Thanks,

        SteveW

  2. Thanks Steve,

    You are an energy guru. The writing is on the wall but it is good to have one who can put it in common folk terms. We are fighting against the current, the resistance is building, the laws of physics will prevail. One day we will live in reality again! Love to all!

  3. I always enjoy how Mr. St. Angelo is able to break down the highly technical data to a language that a novice laymen can understand & make sense of, Thank you, I`m looking forward to the Webinar coming up, Brian B.

    • Brian,

      Thanks for the comment. I am looking forward to the webinar and I believe attendees will learn a great deal.

      steve

  4. Thanks Steve, appreciated.

  5. Spell check “patience”

    • Jud,

      Thanks, made the correction. I type so fast that I rely upon my site’s spell check auto system. I should have a site editor, but it’s a service I still cannot afford.

      steve

  6. End Times Prophecy says that we are on the verge of entering into the 3rd seal which says that it will take a day’s wages to buy a few loaves of bread. This is right in line with what this article is all about and right in line with the direction the world economy is taking. What can you do??? Find out here: ItsHisStory.com

  7. Leveraged labor turned into cracking rocks. Not a good sign. Remember, finance is just steering, not driving.

    • houtskool,

      Correct. ENERGY is the economy. As you know, ALL DEBT is ENERGY DEBT. All Treasury or Bond debt is ENERGY DEBT. Things are going to get very interesting as the world wakes up to PEAK OIL.

      steve

      • Yes Steve. We’re already in big trouble. Look at Turkey, Brexit, Italian banks, terrorist attacks in Europe, the black/white issues in the US. Peak growth is behind us. We will see things happening like they do in Venezuela. Without the opportunity to go shopping in Colombia. It gets worse by the month.

        Your move to the rural west was a good move. Get your tribe in order. I live in sheeple land, while the wolves are howling, the sheeple grab their earplugs and party on.

  8. Wait a minute, I need some clarification. Are production declines due to depletion of the current oil fields (despite the reported increased efficiencies of “horizontilization”, discovery and drilling techniques, the life of each shale oil well is vastly overstated) or is the lower production due to the decreased profitability of new wells due to drop in oil prices, and therefore drop in oil production simply from fewer wells being drilled?

  9. There he goes again! The seven energy companies that Steve shows with a debt of $77 billion, looks very bad until you look at it vs their market cap, which is more than $351,000,000,000, $350 Billion.

    • RDR,

      Yes…. the market cap of those companies is $350 billion. So what. Bear Stearns had a considerable market cap before it imploded.

      Stock prices and market caps can and will evaporate. However, debt clings to the balance sheet like a cancerous tumor.

      All the best,

      Steve

      • One of the long time metrics to look at debt of a company to is to use debt as a function of EV. A reading of over 40% to 50% is considered to be very high and in danger.

        The group of companies you have used has a debt to EV of only 18%! From a debt point of view these companies appear to be very well run.

        • RDR,

          While the debt to EV might be a good indicator for most stocks, I wouldn’t agree with using for oil companies. Oil production will continue to decline and price will remain low. Thus, the debt will likely increase as stock prices fall.

          This will end badly for the U.S. Shale Oil industry.

          steve

          • Production will decline and prices will stay low, Hum!

            For the past 30 years we have had many cycles in the energy industry, where when production was higher than demand, prices went down which caused production to fall, but in the end when production was lower than demand prices went up and not down.

            We are at the point where production is close to demand and falling. Bottom line it will cause prices to recover.

          • RDR,

            I forgot that you live in a VACUUM TUBE. So, you are correct, growth on a finite planet will continue indefinably. How silly of me to forget that.

  10. Ha. Wait’l Alyeska tapers off all at once. I’m not seeing low prices.

  11. We all should be thankful to this heavenly given site and to Steve’s work. Everyone should feel guilty when reading this site, any donation that you make will not equate this great work. ALL, PLEASE GO HIT THE DONATION BUTTON NOW.

  12. I transleted your post in Russian
    see: https://aftershock.news/?q=node/421156

    • vadim44622,

      Thanks. Yes, I took a look at in in Russian on the Aftershock site. Nice site. Glad that citizens from other countries are able to read some of my work.

      steve

  13. Best cure for low oil prices…low oil prices…period. There is much more to the price of oil than company debts here in the US. You cannot logically claim that because the world is going into recession oil prices will stay low forever, if half the US oil companies go bankrupt…production drops like a rock here, Saudi Arabia(opec) turns off the tap because their mission is accomplished, prices rise. Demand increases with low prices(I don’t think twice about jumping in the suburban and going somewhere now, as I did a couple years ago). Demand for oil is in-elastic…very hard for people to cut use, however easy to increase their demand. One other minor detail, you have the worlds central banks steering the ship, there is massive power in what they do and can do yet…don’t underestimate them. I see inflation before massive deflation.

    Bottom line, there is much more to your ‘scare’ theory than you show.

Leave a comment

Your email address will not be published.


*