Happy Monday and welcome back to. The crisp morning air of a spring not quite ripe welcomed those of us in Michigan; our early treatment to hot weather broke abruptly on Friday night to yield cool weather over the weekend. That has held into the start of this week so far.

Growth reports have yielded steady disappointment. Each time we get hit with a lackluster outcome, since late last year, we shrug it off like high times are just on the horizon. What if they aren’t?

There is an old economic theory that maximum production is ultimately bounded above at any given point in time. A society overproducing for the benefit of one generation necessarily creates low demand for the next, ushering in economic hardships, under this treaty of thought. If we think of the 90’s and early 00’s as such a point in time of overproduction (<5% unemployment in the 90's?), then that could maybe explain the ever present weakness in the face of effervescent punditry which we have been subjected to.

This line of thought led to the infamous "smashing windows" comments that are so well known in Keynesianism. Maybe we just need to blow up some more Middle East pipelines…?

I cannot condone shorting assets though. It's just too stupid of a strategy. If this economic idea is behind our weakness, then it follows that the Central Banks are directly at fault (and also directly to be commended for preventing the collapse of civilization 5 years ago, all sort of murkily at the same time). But weak growth will also provide justification for more intervention on the part of the same, the gross irony there barely coming under scrutiny.

So yes the people who sort of set us up for this in the '90's and '00's will almost assuredly break things more, while blaring the catch phrase "WE'RE HELPING!". Which sort of sets us up for more QE and longer periods of lower interest rates and maybe other even more stupid policies we haven't even thought up yet.

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The Fed are “unlikely to hike rates in June”, according to the people who’s sole decision it is to hike rates in June.

Is it supposed to make me comfortable that people with absolute discretion to make a decision talk about themselves from a probabilistic, 3rd party frame of reference? If I walked around these halls muttering “Cain is unlikely to stab someone today”, I imagine I would get admitted.

We’re at the point where we talk about rate hikes because that’s what we’re supposed to do. That’s professional of us, to pretend like we earnestly believe that rates are at any point in the foreseeable future set to rise. It’s professional courtesy, you see.

What’s not professional (and maybe just rude) is to state the obvious; rates aren’t going higher and the Federal Reserve isn’t in control of the ball anymore. It’s not just that they won’t raise rates. They cannot raise them.

Not being able to do something so simple as raise interest rates from the lowest they have ever been is disconcerting. It’s not comfortable to admit.

So a few times a year we get together and in very serious voices hold loud talks concerning whether the big rate hike is imminent. But that day isn’t coming anytime soon and deep down, each of us knows that.

And if, it should perchance, that a major correction should hit us in this state of affairs, all confidence in the Federal Reserve would be completely broken, they would become the butt of jokes, and major change would rip through the system.

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Welcome, friends! For the 2015 DAY OF PATIENCING UPON US (blessings and praise) is, well…upon us!

In all of its infinite glory, the markets have ordained that, on this day, we should all be held hostage to the English predilections of a 68 year old woman.

Now! Wait with fearful deference to the Fed statement yet to be transcribed at the hands of careless twenty year old interns! And pray they do not forget to add the word “patience”. Twice for good measure.

On this remarkable day it is well worth it to go over the rules, which are completely capricious and still being made up at the moment. But here is a short breakdown:

1) IF Yellen says she is “patient”, then the market shall rejoice for no particular reason.
2) IF Yellen implies that she is, in fact, not patient, then the market shall despair for no particular reason.

So how does one know if Yellen is patient or not? Admittedly, it would be great if she just came out and say “Hey all, I’m taking a break from knitting, tending to my bonsai trees, and listening to a close, dear friend talking about her grandchildren to let each and every one of you know – I am super patient.”

That would be a most wonderful day and could very well touch off panacea.

Now, where it could get dicey is if Yellen says she is patient without just saying she is patient. Since these particular letters p-a-t-i-e-n-t seem to mean such a great deal, in that particular order, well then it could be quite a fit if she doesn’t use them.

In such an outcome, I suspect the best and brightest thirty year old micro managers would force their twenty year old trading slaves to lay down and cover their ears while they crosschecked the nearest thesaurus for clues.

To save you the trouble, I am providing you here a convenient list of synonyms for patience so that you can get ahead of the game, because that is the type of unparalleled service we provide around here.

Calm, forgiving, gentle, quiet, tolerant, long-suffering, understanding, accommodating, composed, easy-going, enduring, even-tempered, forbearing, imperturbable, indulgent, lenient, meek, mild, mild-tempered, persevering, persistent, philosophic, philosophical, resigned, self-possessed, serene, stoical, submissive, tranquil, uncomplaining, unruffled, untiring

But naturally this whole exercise is somewhat without purpose, as America’s most brilliant economists and laymen have already determined that interest rates shall be raised. Here is a direct quote from a recent publication:

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School.

Oh, no excuse me for my confusion. That was not from this year, it was actually from 2010.

Here’s the real quote.

Last week, Narayana Kocherlakota, the governor of the Minneapolis Federal Reserve, predicted… the Federal Reserve could raise interest rates.

Wait, sorry…sorry…I lied. That was actually a murmur from 2011.

Alright here is the real quote. For real.

We could still see the euro weaken against the dollar from here, which would still result in lower commodity prices.

What has really changed is the prospect for another plunge. It is most unlikely, with the various central banks of the world looking to shore up Europe, that we go back to an across the board sell off. That does not mean we go higher. It just means we don’t go to $0.

It also means that safe haven plays are at extreme risk. If Europe is not going to disintegrate before our eyes, then why hold half your net worth in gold.

Or treasuries…

…

…okay, I lied again. This time that was me in 2011 betting on higher treasury rates. I cannot recall if I ever made a specific bet on when the Fed exactly would raise interest rates, precisely. I wouldn’t doubt it though. But let’s agree that betting against treasuries in 2011 was just as wrong, shall we?

Here’s a Reuters article in 2012 betting the rate hike would be before late 2014. A cadre of economists actually thought the Fed would just pull the trigger right then and there.

(Reuters) – There is a good chance the Federal Reserve will raise interest rates before the end of 2014, according to a Reuters poll which also showed a significant minority of economists still expect a further easing of monetary policy in coming months.

The poll saw a 50-50 chance the U.S. central bank will break the pledge it made last month to keep benchmark overnight borrowing costs at near-zero for the next two years.

Here’s Fed chair Bullard in 2012 suggesting it would come in 2013.

March 23 (Bloomberg) — Federal Reserve Bank of St. Louis President James Bullard said U.S. monetary policy may be at a turning point and the Fed’s first interest-rate increase since the global financial crisis could come as soon as late 2013.

With policy currently “on pause, it may be a good time to take stock of whether we may be at a turning point,” Bullard said in a speech in Hong Kong today. “As the U.S. economy continues to rebound and repair,” further action “may create an overcommitment to ultra-easy monetary policy.”

Here is LaVorgna, chief U.S. economist at Deutsche Bank, hanging out at with our good pals at CNBC in 2013, ignoring everything the Fed said completely and still suggesting the rate hike would be imminent.

History, in fact, suggests that when the claims number averages below 350,000, you can safely bet a Fed interest rate hike will come within the year, according to research from Joe LaVorgna, chief U.S. economist at Deutsche Bank.

In the current Fed forecasts, rate hikes wouldn’t come until mid-2015, when it expects a rate of 5.8 percent to 6.2 percent.

But rate hikes came when claims averaged 350,000 in 1958, 331,000 in 1961, 345,000 in 1984 and 344,000 in 1987.

“If past is prologue, whereby low and declining claims accurately foreshadow a noticeable pickup in hiring—and hence a sharp decline in the unemployment rate—then monetary policymakers will not be waiting until 2015 before raising the fed funds rate,” LaVorgna said.

Which brings us to 2014, just three months ago, when we started this comical jig, waiting on an old woman to assure us she is still, in fact, patient.

For reference, see Bloomberg.

So let’s have a moment of contrite honesty together. You…me…all of us have been absolutely terrible at guessing when the Fed will raise interest rates. Even the Fed themselves have been terrible about guessing when they will raise interest rates.

The dance above us that you see, prancing over five years, is a display of failure. It is time to admit that candidly amongst one another.

This economics game we play – the underpinning of everything in investing – is not a science. It is an art form, rather; one which is prone to fits and everyone gets to be wrong quite a lot.

So why, dear reader, should I believe that now – with such rampant destruction in forex markets and the US dollar almost audibly sucking air out of the room – is the time to raise interest rates?

Why would you be right this time?

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We’re still in the midst of watching the oil industry unravel in spectacular fashion. I do not feel comfortable even uttering the word “bottom”, not even in jest, for the fear the entire structure would unwind and usher in $10 oil for two decades.

We need more expensive oil. I know you do not want to hear that; why just a few weeks ago I saw a long dormant Hummer H3 roaming the tundra planes of southeast Michigan. A once formidable species, these vehicles could once be seen all across the North American continent.

Their reemergence was a startling sign. Gasoline has gotten cheap.

It is comforting to think of these lower input costs as an unchallenged blessing to America. It is more complicated than that, I am afraid.

High oil prices have been one of very few elements that has actually helped foster stability in third world countries. Watching the recent turmoil and wars, it is easy to forget just how unnaturally peaceful the most recent decades have been in the grand scheme of things. Oil money has been used to weave the social fabric in these places and if oil prices stay low for a sustained period, we are going to see much more egregious cases of foreign sovereign collapse.

Oil prices have also driven the US recovery. The shale revolution was named thusly for a reason; job growth in the US would not have been possible without the advances in shale oil. This is a major pillar of the US recovery and without it our economy is going to suffer. High input costs were a minor inconvenience that came with job growth.

And of course there is the euro. The euro may just be the cause of the oil collapse in and of itself. I cannot say for certain yet, but I am suspicious. The euro and dollar are now almost at parity and this has crippled US exporters. If our own markets are suddenly sloshing around with oil to spare, it is because we are suddenly priced out of foreign markets. This is a precarious barrier…how cheap would oil need to be in this country to enable exporters to compete against euro/dollar parity? The dollar is going to isolate our business and tank us if we let this continue.

We need to start taking steps to regain stability. Bernanke would have never let this happen. Yellen is pushing for normalization of policy and this is not a bad thing. But they are far too comfortable watching a currency move like this happen with our probably largest trade group. We need a weaker dollar and we need more expensive oil and we need it now.

Now, because oil is so cheap, struggling shale producers are clocking overtime to meet payments. This is the exact opposite of what the oil markets need to find a bottom – a glut of even more oil.

In addition to addressing currency and demand issues, we really need a JP Morgan figure to emerge and start brokering some M&A moves that stitch up the supply side. Oil markets are leaking supply uncontrollably and this is going to cause extensive damage if not treated like the dire risk that it is.

The weak hands need to be either bought out or flushed or secured with long term financing. If we can’t shut some of these wells off, we’re going to have irreparable damage on our hands.

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The Swiss bank just announced that the ceiling they have been maintaining against the euro is to be dropped. That would make sense, since the euro is now trading below 1.17, down from almost 1.40 just earlier. In terms of the exchange rate, that had to be getting very expensive.

But the timing here should be viewed as a sign that the ECB is really about to start QE. This should be the stance because if they don’t, the impact would be minimal, but if they do you can’t be on the wrong side of the trade.

In terms of what this QE will look like…well, that is the question. What is the ECB going to buy? Not public debt, surely. How much more financing can these governments stomach with yields already negative in many countries. Even the worst countries, like Greece, are borrowing at rates that an average citizen would envy.

My guess here is two fold: (1) they buy up private financial assets similar to the mortgage program the Fed had in place, but that it will center on short term bonds, while also working with banks to create a long term financing window (EU companies and banks in particular have notoriously short term financing arrangements) and (2) they take the opportunity to absorb whatever mechanisms exactly they have been using, before now, to hide the massive debt loads that should have been coming due over the past three years.

If you forgot, Europe ended up pulling some master BS, using a combination of trade accounts to gobble up the garbage so that the markets wouldn’t have to see it default. I’m hazy on the exact specifics, but I would gamble that those imbalanced accounts are still outstanding; and my guess is they’re about to get totally monetized.

So the big question now is, where do you park money? I think that it would be very stupid to try and be short right now with central banks making big noise and seemingly readying the cannons.

If this is like past central bank action, then any longs will do – equity, commodities, debt, whatever you like. Oil could get a huge boost since it’s been so ravaged. ECB action will give the Fed room to play, especially if deflation keeps up. Yellen is no Bernanke…yet, but she also hasn’t been tried either. If the Fed coordinates, all boats get lifted.

But the safest low key play is probably just to hug U.S. dollars until things are a little more clear.

I am ~78% cash, with positions in CCJ, BAS and VOC, down roughly 3% in the first two weeks of the year.

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Last night, following the second round of feasting, I took a minute to flip open my phone to see how the OPEC meeting went. Looking at the price of oil, I hit a sudden case of indigestion. That was when I knew how bad today would be.

And it hasn’t disappointed. My entire book is down 10% right now. I’m down almost 15% for the year. The energy & gas sectors are solely responsible for this slaughter, taking me from +25% to -15% in a quarter.

Jim Cramer wins, folks. This is brutal. But I’m going to hold fast through it.

I can’t believe that Saudi Arabia is actually waging a price war against the USA. Why the hell would they? We don’t even export, and don’t use barely any of their oil.

If I were Russia or Venezuela or an Iran puppet nation, I’d be looking at the Saudi’s with crazed, lunatic fringe conspiracies ringing in my ears. I don’t know who Saudi Arabia is trying to kill off, exactly. But the most prescient answer may just be “tomorrow’s oil and gas projects”.

The projects that are online now are set for a few years. Hedging has been erected to support them. None of my positions have seen any change in business – that’s the only thing keeping me sane and focused right now. I want to panic, but I just can’t yet.

Check out this report on oil in the Permian Basin (page 14). Average cost per barrel has declined to $55 per barrel. The $80-90 number only applies to new projects.

The average cost per barrel of the Bakken, Eagle Ford, and Permian formations together is estimated at $60 per barrel.

Business Insider posted this graphic awhile back (by Morgan Stanley) that breaks down the extraction cost per barrel (presumably as of 2013-2014, BI is notoriously horrible about leaving off critical information). You can see the first victims of the oil price decline are Arctic drilling and oil sands (read Canada).

You will also notice that North American shale is not so different from so much oil and gas production elsewhere in the world. Yes, the “average” cost of production is higher. But look at the band; it is contained inside the same maximum range as so much else of the world’s oil and gas production. After Arctic and oil sands plays get cut in half, the next round of production cuts will presumably fall fairly even handed, across the highest cost developments, globally. That hardly spells the end times of the USA fracking boom.

Here’s a supporting set of data from Business Insider, provided by Citi. This post is more interesting, because there is a second graphic that shows the cost of every international oil and gas project, by location.

All this trouble for what really isn’t even a problem in the first place. The EIA short term outlook for crude consumption vs. production shows what can hardly be called an issue – a million barrel a day surplus in historical context. The largest gains in the oil supply surplus came from the first two quarters of 2014. You can hardly call those unprecedented; we experienced a much worse supply shock back in the first half of 2012.

Also look at the historic unplanned crude shortages from the Middle Eastern countries (page 15). In the past year alone, half a million barrels a day came back online after having been unexpectedly dropped off. You can see the effect of two separate war times breaking out in Libya. Saudi Arabia is suddenly popping up. Add another country to the mix, or an expansion in lost production from one of those already on this list, and pretty quickly the million barrel global surplus is absorbed.

But the best blessing of all may just be the effects of low oil prices themselves. Globally growth has been terrible and Europe has been our poster child. But with the euro so low and cheap energy prices coming, we may just finally see old mother Europe do something…anything.

This is going to hurt very badly. I was too quick to add back to positions and far to willing to take on margin. But I’m going to stay calm, and wait to see what comes up next.

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