Not long ago, we wrote Ten Reasons Why High Oil Prices are a Problem. If high oil prices can be a problem, how can low oil prices also be a problem? In particular, how can the steep drop in oil prices we have recently been experiencing also be a problem? In our view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently. At some point the debt situation will eventually reach a breaking point.
"My Helicopters Are Ready. You Will All Be Trillionaires." Must see chart of gold in German marks from 1918 to 1923. The Fed - "Silently robbing your purchasing power since 1913 ... "
Be careful what you wish for... Russia matters. It mattered in 1998 when the shock waves from its debt default reverberated around the world. And it would matter again should the plunging oil price lead to economic collapse. That’s despite the fact that Russia is a massive land mass with a relatively small economy. It accounts for only 3% of global GDP and it is dominated by an energy sector that is responsible for 70% of exports. But there are at least five ways in which a crisis for Russia could spread.
It seems rather appropriate that just seven days after the US government hit a whopping $18 trillion in debt, mainstream financial media has picked up the IMF’s recent World Economic Outlook report, which puts the US economy as #2 in the world. China obviously has its own substantial problems, but over the last several decades one thing is for certain - China (and Asia in general) is a place where production and savings are valued. The universal law of wealth is to produce more than you consume. The West has completely broken that.
"The nation was leery of a national bank with seemingly endless power to manipulate the money supply and the Second National Bank of the United States was attacked by both the expansionists and the sound money opponents. It was during this period that future President Andrew Jackson shaped his anti-Bank views in Tennessee while his future hard-money arm in the Senate, Thomas Hart Benton (Old Bullion), shaped his views in Missouri, two of the hardest-hit states. The debate over central banking, and the concern over deflation and inflation, continue two hundred years later."
In any economy, nothing works in isolation. For every dollar increase that occurs in one part of the economy, there is a dollars worth of reduction somewhere else. The real issue is what the fall in commodities in general, including oil, is telling us about the real state of the economy.
“Can a debt crisis be cured with more debt?” it is difficult to envision a return to normalcy within my lifetime (shorter than it is for most of you). I suspect future generations will be asking current policymakers the same thing that many of us now ask about public smoking, or discrimination against gays, or any other wrong turn in the process of being righted. How could they? How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt? How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending.
US Treasury Warns Investors Underestimate "Potential For A Market Reversal", Take "Low Volatility For Granted"Submitted by Tyler Durden on 12/04/2014 13:26 -0500
"Investors may have taken low volatility for granted and underestimated the potential for a reversal. While quantitative easing policies are intended to encourage investors to buy risky assets, there is also a risk that the perceived reversal of such policies will lead investors to turn the other way, triggering market instability.... Similarly, investors may have become too sanguine about the availability of market liquidity — the ability to transact in size without having a significant impact on price — during both good times and bad. Accommodative global monetary policy, coupled with the Federal Reserve’s purchases of large amounts of low-risk assets and changes in risk sentiment, helped to compress volatility and risk premiums. "
Thanks to the People's Bank of China...
Can there be a currency war without victims? Why hasn't any official accused Japan of a currency war?
It seemed almost too obvious. The European Central Bank was imposing negative interest rates and devising new quantitative easing schemes to combat the growing threat of deflation; the SNB was buying foreign currencies in "unlimited quantities" to cap the value of the Franc; the Bank of Japan was madly printing Yen in a desperate frenzy to finally stir up domestic demand; and then the Bank of China responded with its own rate cuts. All this, while the Federal Reserve was quietly ending its quantitative easing policies and even hinting at forthcoming (2015) rate hikes. The long dollar trade, and all it's various expressions, soon became one of the most crowded trades of 2014.
"As was true at the 2000 and 2007 extremes, Wall Street is quite measurably out of its mind. There’s clear evidence that valuations have little short-term impact provided that risk-aversion is in retreat (which can be read out of market internals and credit spreads, which are now going the wrong way). There’s no evidence, however, that the historical relationship between valuations and longer-term returns has weakened at all. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around – not to mention every other time in history that reliable valuation measures were similarly extreme. Honestly, you’ve all gone mad."
1. Heightened uncertainty over the achievability of fiscal deficit reduction goals and containing debt
2. Economic growth policy uncertainties and challenges in ending deflation
3. Erosion of policy effectiveness and credibility could undermine debt affordability
It is no secret that one of the primary drivers of relentless S&P 500 levitation over the past two years, ever since the start of Japan's mammoth QE, has been the use of the Yen as the carry currency of choice (once again as during the credit bubble of the early-2000s), whose shorting has directly resulted in E-mini levitation. One look at the intraday chart of any JPY pair and the S&P500 is largely sufficient to confirm this. Those days, however, may be coming to an end, at least according to Goldman which overnight released a note saying that the Yen is "Almost at breakeven: Further yen depreciation could be a net burden."