In a major blow to mindless punditry, all indications are that high oil prices and European debt crises do, in fact, matter to economic productivity, regardless of whether or not they come gradually, or with a big, flashy fireworks display.

The signs are all there, as two major international companies and key users of petroleum, Exxon Mobile and Dow Chemical, have experienced serious earnings contraction.

XOM, despite having higher revenues, saw an 11% drop in earnings, contributed to by lower production. Having gasoline demand on level with the late ‘90’s probably doesn’t help.

And Dow Chemical, faced with dropping revenues and lower profits, had to take a full 30% drop in earnings so that they could closure plants across the US, Europe, and Brazil, thanks to weak demand from Europe and higher input costs.

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In light of today’s GDP print, the data out of China, as well as the Spanish numbers, please revisit this post from yesterday.

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That debt crisis which had been solved by gargantuan monetary policy backstops in the EU seems to be back, as unfathomable as that must seem to you who were mouthing off last September through December that any further concern about a financial shock from Europe had been “taken off the table.”

“Smoothing out the tail events” is a bumper sticker, not an analysis.  You don’t just smooth over several trillion in short term obligations.

See, the consequence of flinging EFSF/ESF/LTRO money at the bonds is obviously, sharp inflation.  And that’s exactly what the whole of the EU has right now; prices spiking higher on their citizens.  In a place like Spain, that means the 20% of population that is out of work also gets to contend with €8 gasoline.

Joy…

And when your twenty year olds are pushing 50% unemployment, well,…recall that old adage about idle hands.

So the EU is trying to build another €1 trillion backstop?  So what?

It’s not like they can use it.

The price the EU pays by monetizing their debt is enormous.  Look back on all the economic indicators coming out of the EU for the last 3-6 quarters.  Watch in awe as their economies slowly get pulled into recession REGARDLESS of whether or not they print money.

This matters, folks.  Take a good look at the most recent reports of China trade data.  There’s a reason even the Chinese are admitting that European problems are affecting them.  There’s no way they can lie about something that big.  The EU is China’s economy.  Without EU demand, China would have to rely entirely on domestic consumption and growth to spur their economies and organize their labor.

Now if the EU cannot afford to print any more money, how are they in any position to suppress their bond yields?

That seems to be the gist of the yield spike across European countries.  It’s not that the ECB couldn’t just buy up all the bonds and force losses on a few traders.  It’s that they can’t do it without forcing the Greek, Irish, Spanish, Portuguese, and Italian economies into deeper, more painful recessions.

And back home in the USoA, they are getting no support.  Recent reports are that Bernanke met with Republicans about undisclosed conversations.  Is that the kind of behavior one engages in when one is confident they are an autonomous body?

I’ve been saying for a few years now that Bernanke is going to be very aware of Congressional perception to his actions.  He cannot afford the ire of Republicans; even as the minority party, there is a great deal of damage they can do – if not to his actual policy decisions, then to his public relations campaign.

Bernanke has spent the last six months talking down the market, rather than acting.  Having an heavily financed, ideological political party viewing him as the enemy is not a position he wants to be in, because that’s a position where he needs to act rather than speak.

And as Europe has shown us, acting is expensive and riddled with bad tradeoffs.

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“Further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.” – Ben Bernanke

Does this mean QE3 is full steam ahead?  Or does this mean Ben Bernanke is beating that dead confidence-horse, reminding us (again) that rates are not going to be raised.

Don’t be surprised when you get caught having read too far into this.  If Bernanke could get away with printing, he would have done so already.  It’s not exactly a secret that the jobs market is fostering under-employment.

I’ve already picked my side.  I’ll see you QE3 speculators at your one year anniversary.

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Let’s just simplify this conversation, shall we?  Was there an EU country that didn’t contract last quarter?

I’m seeing France, Spain, Ireland, and even Germany experiencing “significant” drawdowns in their manufacturing bases.  This builds on top of continuous, quarter-over-quarter drops across the entire continent.

On top of that, I’m seeing retail sales misses in Canada, Brazilian unemployment shot back up, and China is spiraling the toilette bowl.  I’m hearing talk of turmoil in India.  All of these countries happen to be huge trade partners with the EU.

So what’s not going on an idiot run lower?  Well, the U.S. seems to be doing alright.  But the U.S. is not exactly what I’d call a “global growth” story.

So the big question for those of us here at home is: can the U.S. shake off any EU slowdown?  At what point does having our trading partners self-immolating start to impact us negatively, as a country?

My guess, for months now, is that the EU would witness spectacular contraction, which would effectively negate any growth here in the U.S.  We would go to 0 – “static”, if you will.

Will I be right?  So far, it looks like the data is disagreeing with me.  The U.S. does seem to be pushing ahead.  Is this from the expansion of the North Dakota energy revolution?  It very well may be the case that the U.S. is about to “Saudi Arabia” its way to self-reliance.

Sweet.  You will not see me complain about that.  If the U.S. is about to become a global “island continent” sheltering ourselves from the rest of the loons that occupy this planet, you won’t hear a peep from me.

But outside of the U.S., things are accelerating downward.

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How the shit is gasoline not part of core inflation?  What in this country is even produced without the price of oil attached to it?

You thinking of walking those hand knitted sweaters from Tennessee to Chicago?  You know, the ones you made out of that wool that came from those sheep which live off the grass in your yard you don’t mow.

Economists and banks desperate for more free money seem to be getting aroused on the prospects of lower meat and vegetable costs, since they have equated lower prices to free dollar showers.

But let’s be honest; saying the cost of meat is down isn’t really that useful.  Logistics matter.  Where is all this cheap meat?

You go tell some starving kids in Ethiopia about all that cheap food we have in the developed world.  Or maybe let some freezing asshole in Siberia in on all the free natural gas we have here in the U.S.  See how appreciative they are.

And every component of logistics in driven by the cost of…wait for it…fuel.  The cost of oil matters to the real costs of goods…that’s gasoline and diesel prices.

Tap water may be free in Europe but, looking at their gas prices, free water isn’t coming soon to a Sahara near you, if you follow me.

Which is all that really matters.  It’s why Bernanke has been talking a big game, yet stays glued to the sidelines.  He can pretend like costs are down all he wants, but when the whistle blows, we’ll see how that philosophy works out, now won’t we?

Close your eyes and imagine this; a human sized gas can with a face and eyes, holding a shocked/terrified expression while a commodity trader holds a gun to its “head.”  You can imagine Bernanke there too, with his arms raised to the sky, while he exasperatingly tries to talk the gun-wielding dollar-shorting maniac down.

That’s what I would draw for you, if I didn’t suck at drawing caricatures.

That’s where things are right now.  It’s why QE3 isn’t coming.  And it’s why nobody should care that there’s subdued inflation everywhere but where it counts.

But hey, you doubt me?  Go buy some of that awesome, cheap crude oil they have stored in Cushing, OK.  You can always sell it in Chicago or New York, after all.  You know where that’ll get you?

Stuck in the middle of fucking Oklahoma.

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You’re going to regret bidding up oil prices all because some Neanderthals in a dessert were making hostile remarks. Your theory of “Iran Price Spike” is about to get kicked down a 9 story spiraling staircase.

It couldn’t come at a better time, really. Another five months hearing about the self-described fecund investment projects of you strumpets – “I’m buying AAPL.” – and I might have had to take a leap off a balcony.

Just remember what I told you. This year, China bulls are going to be subject to the Catherine Wheel.

Looking your way, Rogers.

How any of you seriously contemplated escaping demand destruction in Europe by running to their biggest supplier is beyond me – thank God.

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