….. investors desperate for “yield” — i.e. some return more-than-zilch on their money — ended up in the bond market’s junkyard. These investors, by the way, were the big institutional ones, the pension funds, the insurance companies, the mixed bond smorgasbord funds. They were getting killed on ZIRP.

 In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10 percent and do what they had do — write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries.

ZIRP ruined all that. In fact, ZIRP destroyed the most fundamental index in the financial universe: the true cost of borrowing money. In doing so, it twerked and torqued the concept of “risk” so badly that risk no longer had any meaning. In “risk-on” financial weather, there was no longer any risk. Imagine that? It also destroyed the entire relationship between borrowed money and the cost-structure of the endeavors it was borrowed for.

Take shale oil, for instance.

The fundamental limiting factor for shale oil was that the wells were only good for about two years, and then they were pretty much shot. So, if you were in that business, and held a bunch of leases, you had to constantly drill and re-drill and then drill some more just to keep production up. The drilling cost between $6 and $12-million per well. What happened the past seven years is that the drillers and their playmates on Wall Street hyped the hoo-hah out of the business — it was a shale revolution! In a few short years they drilled to beat the band and the results seemed so impressive that investment money poured into the sector like honey, so they drilled some more. It was going to save the American way of life. We were going to be “energy independent,” the “new Saudi America.” We would be able to drive to Wal-Mart forever!

Be careful what you wish for, the old saw goes. The shale oil “miracle” was an epochal stunt. They goosed so much oil out of the ground in a short period of time that they killed the goose — demand for oil at a price that made it worth drilling for. Now, much of the junk financing will default, and the result of that is no more junk financing for a long, long time, meaning that a lot of planned wells will not be drilled and completed, meaning that the current crop of short-lived wells will crap out in the 24 months ahead, and production will not be replaced by new wells, which will not be there. When and if the riggers get busy again in the Bakken and the Eagle Ford, you can be sure it will be at a much lower level of activity than the glorious year 2014. Of course, it remains to be seen how much financial illness the spoiled junk bond paper will spread through the derivatives markets…..

Finance was the lifeblood of the global economy and scam after scam left it riddled with wormholes of fragility. That fragility has been waiting to express itself …..