The origin of the ‘08 financial crisis was people’s desire to own homes; The CAUSE of the crisis was the debt ON DEBT that was put there.

Throughout history, when the ability to generate real returns dry up, bankers get creative. In ‘08, all this origination meant lots of fees and all the leverage meant higher equity returns (and fees). But when the music stopped, it almost brought the economy down with it.

In the past 10 months I have focused my attention on the supply side and recommended dropping rigs aggressively in Dec as a result. This would cause production to decline, prices to rise and the industry would get healthy (I thought).

It turns out, my ‘conclusion’ as to why it took 10 months to drop rigs (that MGMT was stupid) was not complete: What I missed was balance sheets.

There is a scene at the end of ‘The Big Short’ where Steve Carrell says “They knew there would be a bailout; They weren’t being stupid. They just didn’t care” While not exact- the parallel is scary: commodity price is to O&G companies what the Fed was to housing. And commodity price isn’t cooperating. Now they have no choice… This week, we focus on leverage and what happens to CF when rigs are dropped. It turns out that the price crash has been a distraction to something way scarier.