Bear Market

While none of the following analysis suggests that a market crash is imminent, it does imply that we are very late in the current market and economic cycle. A market melt up into 2015 would certainly be exciting, but should be used to sell overly priced assets to what will probably be a dwindling supply of "greater fools."

"Over the next five years investors now expect inflation to average just below 1.3%. This level of expected inflation has always previously been associated with a decline in US equity prices. There have been no exceptions until today." Russell Napier

While we were expecting that one-time "god of crude oil trading" would have a poor year as a result of his consistent bullishness on the crude space, we were quite astounded to learn, as Bloomberg first reported yesterday, that Andy Hall - the man whose name was for a decade legendary in the commodity space - would call it a day. And yet that pales in comparison to the WSJ report overnight than Phibro itself, Andy Hall's 113 year old employer currently owned by Occidental Petroleum after its sale by Citigroup, would liquidate in the US after it failed to buy a buyer, marking the end of an era.

If we're in a gold bear market, then answer these questions...

First the BIS came out with the following stunner when discussing markets: "The highly abnormal is becoming uncomfortably normal. Central banks and markets have been pushing benchmark sovereign yields to extraordinary lows - unimaginable just a few years back. There is something vaguely troubling when the unthinkable becomes routine." And now the routine of the unthinkable has forced Deutsche Bank to look at the unprecedented disconnect between the collapse in energy assets and the general market - which continues its hypnotized, low-volume levitation - and conclude that it makes absolutely no sense:  "We find current dislocation between deep distress in Energy assets and marginal reaction in broad market indexes to be inconsistent with each other. Either energy has to rebound noticeably, or it could pull broader market indexes lower. Exceptions to this assessment are rare."

The DJ Cyprus Total Market Index is at present down 99.71% from its all time high made in 2007, so we would say it is definitely the most oversold stock market in the world in all of history. From 100 euro invested at the peak, a mere 29 cents are left. Let us briefly ponder the mathematics of this wipe-out: when the market was down by 90%, it fell by another 50% at which point it was down 95% from the high. Thereafter, it fell by another 50%, ending down 97.5% from the high. Then it fell by another 50%, at which point it was down 98.75% from the high. Then it fell by 50% again and was down 99.375%. Surely this was bad enough? Nope…it then fell by yet another 50%, landing at 99.6875% down from its 2007 high.

Thanks to the People's Bank of China...

It's not just Shale oil stocks in the US that are hurting. Following the OPEC decision to not cut production and squeeze US producers, Saudi Arabia's major stock market index has tumbled into a bear market, giving up all the year's gains. As one analyst noted, "investors are afraid if oil stays where it is, it will negatively impact the government revenues, thus creating potential headwinds on government spending." Dubai stocks - our long-time favorite bubble index - has also been hammered, down over 7% intraday at its worst...

Recently we posted the following article commenting on the impact of USD appreciation and dollar circulation among oil exporters, as well as how the collapsing price of oil is set to reverberate across the entire oil-exporting world, where sticky high oil prices were a key reason for social stability. Following today's shocking OPEC announcement and the epic collapse in crude prices, it is time to repost it now that everyone is desperate to become a bear market oil expert, if only on Twitter...

In some respects we’re in danger of running out of appropriate descriptive superlatives for the current bout of “irrational exuberance” (we’re open for suggestions). The current asset bubble is in many respects reminiscent of the late 1990s tech bubble, but it also differs from it in a number of ways. One of the major differences is that the exuberance recorded in the data is largely confined to professional investors, while the broader public is still licking its wounds from the demise of the previous two asset bubbles and remains largely disengaged (although this has actually changed a bit this year). Monetary pumping merely redistributes existing real wealth (no additional wealth can be created by money printing) and falsifies economic calculation. This in turn distorts the economy’s production structure and leads to capital consumption, thus the foundation of real wealth that allows the policy to seemingly “work” is consistently undermined. At some point, the economy’s pool of real funding will be in grave trouble (in fact, there are a number of signs that this is already the case). Widespread recognition of such a development can lead to the demise of an asset bubble as well.

Major equity / Credit divergences should always be taken very seriously. They were among the best forward looking indicators at almost every major turning point for equities over the last 20 years. Today, the divergence is visible again. The fact that all this is happening while bullish sentiment in the US is at record highs is of particular worry. Everyone is expecting higher equities due to lower yields and depressed food and energy prices. But when everyone is thinking alike, no one is really thinking...

A bull market in the US Dollar is underway and its magnitude and duration are likely to catch everyone by surprise

WTI Crude oil prices tumbled to a $75 handle this morning as Saudi oil minister al-Naimi dismissed claims of a price-war as having "no basis in reality" noting that "Saudi oil policy has remained constant for the past few decades and it has not change today," suggesting expectations of a supply cut at the looming OPEC meetings are overdone. This comment comes after Qatar said it "may" cut output by 500k barrels/day.

what is strange is that while traditionally such a major downward growth revision would have been sufficient to send futures soaring - why: because in a world where only central banks are left, it means more central bank global bailouts of course - this time the adverse update actually had the impact of sending futures to their lows of the session, granted just a few tiny points since the market is clearly disconnected with even the most pro forma, non-GAAP version of reality, but the reaction direction was clearly unexpected. Perhaps this is explained by the ongoing devastation in both WTI and Brent, which were trading at $76.70 and $82.50 at last check, both down almost 3% as the plan to use Saudi Arabia to crush Russia has instead backfired and the Saudi princes are now openly looking at destroying the US shale infrastructure, as we forecast in the worst, for Obama, scenario.

China first delegated the management of gold policy to the People's Bank by regulations in 1983. To our knowledge this subject has not been properly addressed by any private-sector analysts, which might explain why it is commonly thought that China's gold policy is a more recent development, and why even industry specialists show so little understanding of the true position. But in the thirty-one years since China's gold regulations were enacted, global mine production has increased above-ground stocks from an estimated 92,000 tonnes to 163,000 tonnes today, or 71,000 tonnes; and while the west was also reducing its stocks in a prolonged bear market all that gold was hoarded somewhere.