The Real State of the Union: There Will Be Blood

President Barack Obama delivered the State of the Union address last night and 19.4 million viewers tuned in– a 6% decline over last year.

If you only listened to what the President said, you might think our country was in pretty good shape. He emphasized recent job growth and the rising stock market as proof that we were on the road to recovery.

He also laid out a noble plan to revitalize the middle class through tax credits and free access to community college.

It’s been called a “Robin Hood” plan as Mr. Obama said he intends to fund all of these proposals by raising taxes on the wealthiest Americans, including higher capital gains taxes and increased taxes for asset transfers to heirs after death.

Republicans are skeptical. Speaker of the House, John Boehner said that Mr. Obama’s agenda was a collection of “unserious proposals.”

The real State of the Union is something far more serious and troubling. Even though the President said the “crisis has passed”, a closer examination of the economy reveals a disturbing reality: we are no better off today than we were in 2008. In fact, we could be poised for the greatest economic crisis this country has ever seen.

30 year return Treasury Bonds have fallen to RECORD LOWS. That means that long term confidence and faith in the health of the economy is also at a record low.

Obama touted the job growth, rising wages, and increased energy production, but there are some significant facts that he conveniently failed to mention.

The labor participation rate is at a 40-year low. Millions of Americans have simply given up and stopped looking for work. Those people aren’t counted as part of the official “unemployed” numbers because they aren’t applying for unemployment benefits anymore. 

Another fact that Obama failed to mention is that most of the job growth we have seen in the past few years has been in the energy sector, which also ties into that illusion of rising wages.

According to most of those new jobs have been in Texas: “Since June 2009, which marked the official end of the recession, until July 2011, the number of jobs increased in the state by 328,000. Nationally, the job growth in that time period was 697,000, according to figures from the Bureau of Labor Statistics. That means Texas jobs made up 47 percent of the national net job creation.”

And as we recently reported, the recent fall in gas prices has led to a huge decline in the shale oil industry, causing many fracking companies to not only stop exploring and drilling for new wells, but to shutter operations entirely. So not only is the increased energy production over, those jobs that were created are vanishing in thin air.

The break-even point for shale oil drilling is $58 per barrel. With gas hovering below $50 per barrel and possibly going even lower, these companies are having to cut jobs and close down drills left and right.

The Dallas Federal Reserve estimates that 140,000 jobs will be lost in Texas in 2015 due to falling oil prices, which is nearly half of the jobs added since the recession ended. Not only that, but each energy sector job equates to about 10 service industry jobs in terms of money flowing through the economy.

The Saudi Oil Minister recently stated that “we will never see $100 per barrel oil ever again”.

Many investors and large banks holding bonds and derivatives denominated in oil futures are dependent on a minimum of $80 per barrel to remain profitable.

There Will Be Blood

If those contracts come due and oil is at $40, those investors and those holding financing contracts are going to lose A LOT of money. It’s not known how much of the bond and derivative market is denominated in oil contracts but it is likely in the trillions of dollars.

Last year, Wells Fargo had 15 percent of its investment banking fee revenue come from the oil and gas industry, while Citigroup, had 12 percent. Other banks in Canada and Europe have even greater amounts invested in the energy sector. Scotiabank had approximately 35% of its investment banking revenue come from oil and gas contracts in 2014. That means the complete impact of these low gas prices has not even been realized yet. 

The President also spoke very little about how bad things are in the rest of the world except when he was talking about how well the U.S. was doing in comparison. As British Prime Minister David Cameron has said on multiple occasions, there are warning lights flashing on the global economy.

The real state of the union is that we could be in for some very serious trouble ahead.

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