The Economics Of A Crash – Alasdair Macleod

Bloomberg was out today heralding the “new bull market” in oil.  I herald it as Bloomberg’s new bullmarket in bullshit.  The price of oil is determined in the short run by a lot of factors besides the law of economics.  The spike up today in the price oil was most likely technically driven by hedge funds covering large short positions put on over the past couple of weeks.  The short-cover trigger was likely a big bid put into the market by the Too Big To Fail banks backed by the Fed.

Make no mistake about it, the Federal Reserve in conjunction with the big banks have “blood money” motivation to try and keep the price of oil propped up.  The big banks are exposed both on and off balance sheet to the price of oil.  Many of the big banks are heavily exposed on-balance sheet to the collapsing oil shale/fracking industry in the form of hundreds of millions of asset-based revolvers.  These are shorter term funding facilities, the size of which is determined by the value of the estimated shale reserves of the borrower. However, many of these revolvers were drawn down when the price of oil was much higher.  It is highly probable that the big banks like JP Morgan are sitting on drawn revolver facilities that are worth dimes on the dollar.

Preventing this default has become a growing problem and is the primary task facing central banks. Household, corporate, government and financial sectors are all exposed to debt default, ensuring political and business considerations will allow no alternative outcome.  – Alasdair Macleod (link below)

A former colleague of mine who trades distressed energy debt told me he thought the big banks had these debt facilities marked at par (100 cents on the dollar).  When I asked him if if any of was trading yet in the secondary market he responded:  “no, but all hell will break loose when it does.”

This debt will blow big holes in bank balance sheets.  We only can assess the on-balance-sheet damage.  There is no doubt 10x that amount of exposure in the form of OTC derivatives.  The lower the price of oil goes, the bigger will be the hole that is blown.  This is specifically why the Fed/TBTF banks are working to keep the price of oil aloft and why they are feeding pump and dump outlets like Bloomberg the information that a new bull market in oil has started.

Equity markets are telling us that the debt crisis is now upon us again. The detailed course that events will take from here cannot be predicted, but we can be certain that over the coming months governments will be ready to move heaven and earth to prevent a deepening crisis, by any means at their disposal.  – Alasdair Macleod

The start of an economic crash of unprecedented magnitude began in 2008.  The true severity of this crash was delayed by mark to market accounting, increased debt issuance and money printing.  Many trillions of it.   But ultimately history tells us that the no amount of artificial manipulation and attempted market control can evade the laws of economics. The collapsing price of oil is a rock-solid indication that economies globally, including and especially the U.S. economy, are in a state of collapse.

Alasdair Macleod has written a must-read commentary/analysis of what is now unfolding and why.  You can read his entire article here:   Economics Of A Crash

The Shadow Of Truth will be hosting Alasdair this Thursday.  We will discussing this article as well as his take on what is now unfolding in the precious metals markets and China.

15 thoughts on “The Economics Of A Crash – Alasdair Macleod

  1. Dave, you have done a very good job developing your site. You have a good variety of guests you interview (unlike KWN who seems to interview the same handful of guys again and again (who say the same things again and again)), but I particularly enjoy the way you dovetail your own two cents into what they say or write.

    Looks like you are gaining the critical mass needed to attract the quality interviewees. I look forward hearing you and Alasdair talk. He often brings forth items from a different direction/angle.

    Congratulations of what you’ve built here.

  2. isn’t it rather “mark to model” accounting replacing mark to market that delayed the true severity of the 2008 crash (and reversed the equity market)?

      1. Years ago, the Financial Accounting Standards Board required that the banks carry their assets at historical cost. They changed that to carry assets at current market. When everything started to head south the only marks available were wild guesses. The FASB denied a request for the banks to return to mark to cost. The banks then marked down their portfolios and all hell broke loose.

        Many of those questionable mortgages probably would have gone bad but it would have been over a period of three to five years instead of in one fell swoop. The markets and the economy might have been able to handle the corruption and incompetence of the FED, the Congress, Fannie May and Freddie Mac, the Justice Department , and the banks themselves if the assets were carried at cost. The immediate write downs destroyed solvency and liquidity and caused the panic. It worked out fine for the TBTF banks because they survived and we, the taxpayers, are on the hook for them. They all should have been taken over at once like the S and Ls or allowed to go bankrupt piecemeal.


  4. With your permission, I would like to purloin and plagiarize your phrase “a new bullmarket in bullshit” as it has been added to my list of favorite quotes of all time–I am undecided whether to use a picture of Obama or Dennis Gartman.

    1. Citi is not a big underwriter in the junk market. I doubt they have exposure to the sector the way banks
      like JPM, BAC, Deutsche and Morgan Stanley.

      Also, Citi’s research has had the appearance of a modicum of independence from conflict lately, they’ve been
      bearish in general.

  5. Monetarily Sovereign Nations that create their own Fiat currency-money are in no danger of default from outsiders unless their debts are denominated in currencies they do not create. Governmental entities that use currencies and have debts in currencies they do not create can default. Money-currency does not have to be created simultaneously with debt – there are other options. The problem today is that too much fabricated debt cannot be repaid with interest because individuals, businesses and governments do not have sufficient income. However money-currency and income are interrelated legal-accounting fictions that should serve humanity – not enslave us. To learn more about a viable, legal, creative and feasible alternative to the corrupt, broken and irrational status quo matrix, please visit the WGO (“”) to see how people can collective have a universal basic income via the creation and distribution of a new debt-free, digital currency.

  6. Accounting profession is now a “state within a state”, interpreting the law incorrectly to suit its own interests

    International accounting standards do not meet the requirements of UK law
    Posted on September 1 2015

    The Times has reported this morning (paywall) that:

    The legal cornerstone underpinning the entire edifice of bank accounting is defective, according to a QC’s opinion that questions the approach by accountants at the top of the profession and criticises their regulator, the Financial Reporting Council.

    The potentially explosive legal opinion, seen by The Times, makes plain that the billions of pounds of profits reported each year by UK banks cannot be relied upon to give a “true and fair” picture of the financial position of Britain’s biggest financial institutions.

    George Bompas, QC, accuses the FRC and the Institute for Chartered Accountants in England & Wales of defective logic in supporting the present accounting standards.

    I have also seen the opinion in question, which was prepared for the Local Authority Pension Fund Forum, who I advise on tax matters. The chair of that Forum has said in response to the ruling:

    The issues are far from trivial, as exemplified by the banks getting the standards wrong, meaning that the accounts in some cases were catastrophically wrong. The accounting profession has effectively become a ‘state within a state’, interpreting the law incorrectly to suit its own interests and in LAPFF’s opinion against the public interest.

    I agree, and think that, if anything, the issue is more significant than the one on which the opinion focusses.

    That focus is on whether or not International Financial Reporting Standard properly identify the split in the profits of a company between those that are realised and those that are not. The point is vital: dividends can only be paid out of realised profits (those likely to have resulted in real cash earned) to make sure that a company will remain solvent despite paying a reward to its members. Unrealised profits are not available for the payment of dividends as if used for that purpose they threaten solvency and so the ability of the company to pay its creditors. This is pretty fundamental stuff.

    And George Bompas QC is quite clear: because accounts prepared under IFRS do not require that this split be shown, and because the law requires that they do in his opinion, and because there is no other place where the data could be obtained from, meaning that the omission is in effect a breach of the law since those needing the data to check that it is reasonable to trade with the company cannot secure it, then UK accounts prepared on this basis are defective.
    – See more at:

  7. Last time the Fed bailed out the banks by buying the bad mortgage paper at 100 cents on the dollar. So this time, why doesn’t it bail out the banks and the oil companies by buying the oil reserves (oil rights or land leases) that served as collateral on the loans on the same outlandish, originally projected price? The Fed is already the biggest holder of mortgages in the country, why not also become the biggest owner of oil reserves? Isn’t the Fed’s game plan to just buy everything and fill all the bank accounts with digits?

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