Deflation and the attendant risks caused by a sudden revelation about hidden debts will remain the chief concern for investors and policy makers in 2015
This is it, folks; this is the endgame right in front of our faces. The year of 2014 is the new 2007, with all the negative potential but 100 times more explosive going into 2015. Our nation has wallowed in slowly degrading financial conditions for years, hidden by fake economic statistics and manipulated stock prices. All of it has been a prelude to a much more frenetic and shocking event. We expect a hailstorm of geopolitical crises over the next year to provide cover for the shift away from the dollar. Ultimately, the death of the dollar will be hailed in the mainstream as a “good and necessary thing.” They will call it “karma.” They will call it “progress.” They will even call it “decentralization” and a success for the free market. But it will not feel like a positive development for the American public, who will suffer greatly as the dollar crumbles.
The fall of the rouble this year has been severe, with a 50 percent fall against the dollar and of course gold this year. The slide has been precipitous as in the past two days alone, it fell about 20 percent against the dollar and gold.
On Monday, the ruble fell 10% against the dollar and gold followed by another crash of 11% on Tuesday, despite a massive rate hike.
I realise that it is not normal to have a bearish risk view for December through to mid-January. Normally markets tend to ramp up in December and early January before selling off later in January. But this year I do think things are different. One look at the moves in core bond markets over 2014, when almost everyone I talked to had been bearish bonds, paints a stunning picture. I would entitle this picture ‘The Victory of Deflation’, or (as many folks now talk about (but still generally dismiss)) ‘The Japanification of the World’. I may end up eating my words in 2015 if the US consumer does come through, but if he or she does not, then we may well need QE4 from the Fed to battle the incredibly strong headwinds of deflation around the world. And I will revert on this subject, but to me the coming ECB QE and more BOJ QE are woefully inadequate substitutes for USD Fed QE.
Most commentators remain in a state of denial about the enormity of the price fall underway. Some, failing to understand the powerful forces now unleashed, even believe prices may quickly recover. Our view is that oil prices are likely to continue falling to $50/bbl and probably lower in H1 2015, in the absence of OPEC cutbacks or other supply disruption. Critically, China’s slowdown under President Xi’s New Normal economic policy means its demand growth will be a fraction of that seen in the past. This will create a demand shock equivalent to the supply shock seen in 1973 during the Arab oil boycott. Today's ageing Boomers mean that demand is weakening at a time when the world faces an energy supply glut. This will effectively reverse the 1973 position and lead to the arrival of a deflationary mindset.... Prices have so far fallen $40/bbl from $105/bbl since we first argued in mid-August that a Great Unwinding was now underway. And there have been no production cutbacks around the world in response, or sudden jumps in demand. So prices may well need to fall the same amount again.
- Ruble Sinks to 80 a Dollar Defying Surprise Russia Rate Increase (BBG)
- Oil slumps near $59 for first time since 2009 on oversupply (Reuters)
- Oil sinks, Russian moves fail to quell nerves (Reuters)
- Fed Seen Looking Past Low Inflation to Drop ‘Considerable Time (BBG)
- Students Among Dead as Pakistan Gunmen Kill 126 at Army School (BBG)
- Repsol to buy Talisman Energy for $13 billion (Reuters)
- Indonesia’s Rupiah Erases Decline After Central Bank Intervenes (BBG)
- Anti-Islam Rally Grows as Immigrant Backlash Hits Europe (BBG)
- Saudi Arabia is playing chicken with its oil (Reuters)
The shale oil “miracle” was an epochal stunt. Thanks to ZIRP, what every pom-pom carrying cheerleader failed to note was how much of the day-to-day shale operation was being run on junk bond financing. ZIRP destroyed the most fundamental index in the financial universe: the true cost of borrowing money. 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 and the ability of bank wizards to squelch and conceal it may have come to an end. There will be no quick cure for cratering oil prices and the damage it will wreak among the shale drillers.
Silver bullion demand remains very robust as silver stackers continue to stack. 2014 has been another record-breaking year at the U.S. Mint which has sold 43.3 million silver eagle coins – up from 42.7 million coins last year.
- Sydney Siege Sparks Muslim Call for Calm Amid Backlash Fear (BBG)
- Oil Spilling Over Into Central Bank Policy as Fed Enters Fray (BBG)
- Biggest LBO of 2014: BC Partners to acquire PetSmart for $8.7 billion (Reuters)
- Tremble algos: the SEC has hired... "QUANTS" (WSJ)
- When the bubble just isn't bubbly enough: There’s $1.7 Trillion Locked Out of China’s Stock Rally (BBG)
- Oil price slide roils emerging markets, yen rises (Reuters) - may want to hit F5 on that
- Libya Imposes Force Majeure on 2 Oil Ports After Clashes (BBG) ... and will resume production in days
- Amid Crisis, Pimco Steadies Itself (WSJ)
"... America has followed the Soviet Union down the path of re-engineering its ideological culture... shifting towards a new socialist middle ground where centralization has woven the macro economic system tighter around a supra-sovereign statehood... They will say no one saw it coming... The sad reality is that the disorganized masses will remain ignorant to the whole process as they become consumed with television news drama that hides the structural truth behind the engineered cultural implosion of the American identity."
While the entire financial world is hanging on to every Mario Draghi word in hope Europe finally improves the market's (if not the economy's) "fundamentals" to new record highs, and joins the rest of the "developed" world's central banks in injecting trillions of liquidity into the Div/0 P/E stocks "whatever it takes" (because in a world where only multiple expansion is left, the ECB is the last wildcard at least until the US is dragged right back into the global recession and the Fed admits any pipe dreams of a rate hike in 2015 were just that), something far more different may be taking place behind the scenes. According to at least one journalist, the Fiscal Times' Patrick Smith, "Draghi appears set to leave Frankfurt and return to his native Italy the first chance he gets."
Not a day passes without pundits on either side of the debate, eager to make their case that the acute, nearly 50% plunge in the price of crude, swear up and down their preferred economic ideology of choice that said plunge is [bullish|bearish] for the economy. The reality is that the true impact of the great oil crash of 2014 will not be revealed for at least several months, however for those who can't afford to wait, or simply lack the patience, here is perhaps the most comprehensive view of the pros and cons of what has now been dubbed a "textbook macroeconomic shock" by Deutsche Bank.
The only reason this bond bubble exists isn`t due to the lower price of oil, it is directly a result of too much cheap liquidity via ridiculously low interest rates by central banks.
This weekend's reading list is a collection of articles discussing the good, the bad and the ugly of the dive in crude oil prices.
While the question of supply vs demand in global oil markets is merely different sides of the same coin, we hope the following "name that chart" image provides some clarifying perspective on what is really dragging oil prices lower...