Goodbye Bond Vigilantes, Hello Brent Vigilantes

Tyler Durden's picture

The flood of Central Bank liquidity into the world's asset markets has worked wonders for the optics of 'wealth' in the last few years. While correlation is not causation, the divergence from any sense of fundamental reality (and sheer miracle expectations of the future) simply reflect back to the leaking of that central bank liquidity into risk markets everywhere. However, there appears to be a limiter - or self-governor - that comes along every few months to tap the world's 'belief in economic miracles' on the shoulder. That 'self-regulator" is almost beyond the control of the central banks - it is simply, the cost of energy.

Time and again in the last few years, even as central bank balance sheets have risen inexorably, we get corrections in equity markets that bring them back to a fundamental reality, however briefly. The catalyst for those 'corrections' is hard to pin-point but a step back and we see that the flood of new money also spills out to anything that can't be printed (gold, silver, oil) and it is the latter that has a natural drag on the global economy. So, while the 'wealth' transmission mechanism is now the only policy tool left for central banks, it is the price of Oil that caps that upside thanks to its impact at the margin of a fragile global economy.

Nowhere is this more clear than in Europe, where each time Brent crosses above $120 (helped by central bank largesse), macro-economic surprises start to deteriorate rapidly and markets fade. We are close to $120 (Brent) once again now... With government bonds in US and Europe 'managed' so well, the vigilantes have left the building - and moved to the Crude oil pits...

The same is evident in the US - with $100 WTI apparently the trigger...


which makes one wonder what is driving the Brent-WTI spread divergence (aside from fundamentals which we discussed previously) as it seems $100 is desperately defended in WTI and Brent left to wonder. But judging by today's move - they are starting to lose the battle...


The Brent VigilantesTM are back in charge...

(h/t SocGen)

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Mr Lennon Hendrix's picture

EROEI meets absolute destruction of the fiat currency system, bitchez.

falak pema's picture

I love the concept of negative entropy use! 

Also these boundary issues are often not addressed. Good post; <TY! 

LawsofPhysics's picture

Yes, works great until the sun runs out of nuclear fuel.  And then there is that issue of the flux required to feed and maintain a certain standard of living for 7+ billion people.  The long and short of it all is to invest resources wisely, period.

steve from virginia's picture




Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.


However dire you think the situation is, your thinking is not dire enough.

Jason T's picture

burning wood bitchez $190 a cord.. same as last year.

ricky2's picture


Dr. Engali's picture

We are witnessing the death of the petro dollar. If you think oil is a bitch now just wait until war gets fully priced in.

redpill's picture

Oh yeah?  Well, well, can't eat oil!!!


Thankfully this is all excluded from Core Inflation.  Whew!

SmittyinLA's picture

war is "priced" in immigration

adr's picture

Well if motherfucker A bought WTI contracts at $90 he definitely wants the price to hit $100 or more to maximize the value of the contracts he bought. Fundamentals and consumers be damned. The motherfucker has to feed his motherfucking kids right? After he buys a new house in the Hamptons and a new Bentley, but the kids have to eat. I mean if the contracts go to $80 he might have to settle for Porsche Cayman, and a 4500 sq ft home, how will the kids play in less than 5000 sq ft? The kids might have to settle for *gasp* Princeton!!!!

fonzannoon's picture

adr you make a good point but you completely miss the balls in the face factor. As crude crosses over higher and higher benchmarks the economy falls apart. As it becomes impossible to hide the crumbling macro picture, when asked why the market continually goes higher in the face of that, the MSM pundits lose the ability to bullshit fake data and resort to pulling their pants down and yelling "HOW U LIKE MY BALLS IN YOUR FACE!"

It is not until after the massive balls in your face rally that we can look for the appropriate 2-4% correction and better entry point.

Ness.'s picture

Well if motherfucker A bought WTI @ $90 and it went to $80 then motherfucker A would lose money dumbass.  Anyway, you remind me of my brother and his family.  They live in the sticks (nothing wrong with that) I live in a large city.  He constantly complains about the price "he" has to pay for gas because of the evil speculators (me - No mention of the EFD actions).  He owns 4 trucks, 4 4-wheeler's, and several boats and every little gas guzzling toy on the planet.  I rarely, if ever, drive a car (public trans) and I own a bike.  He (his family) uses more gas in a month than I'll use all fucking year.  

And I'm the 'evil one?  Blow me - you're an idiot and I make money using your ignorance in my favor.

Fill that fucker up - I want $115 WTI.

fonzannoon's picture

anyone who owns 4 trucks and several boats etc. sounds like a real dumb fuck for complaining about the price of anything.

steve from virginia's picture




You don't want $115 WTI, that means $135 Brent with the wheels coming off the economies, everywhere. Afterward is -$70 WTI.


You don't want $70 WTI either b/c it shuts in Bakken and deepwater along with tar sands and a lot of new plays in places like Russia and Brazil. There are shortages that don't push the price but cause job losses and bankruptcies instead. This causes the WTI price to fall further. This shuts in more crude, causes more shortages, triggers more bankruptcies ... in a vicious cycle. It is the analog to Irving Fisher's 'debt deflation' ... 'fuel deflation'.


Even if you don't want $70 WTI yr going to get it anyway. A lot of folks are going to own large, hollow metal paperweights.


orangegeek's picture

WTI Oil monthly shows retracement still completing.


As the economy slows, so too will consumption - one part of the equation.  The other is anyone's guess - who will game the system and shut down production?

ekm's picture

Thx a lot Zerohedge.

It's been few months already I've been trying to get this conclusion across. Crude oil price controls everything, PERIOD.


Thx a million.

ekm's picture

I would even say that any dollar of Brent crude price above $80, is where the economy goes excrement.

forwardho's picture

ekm, yes.

Think energy wars.

Its where reality bisects fantasy.

Manthong's picture

Don’t forget the wild cards.

Obama… SPR… Empty tankers waiting to store JPM crude

Maybe it does not have anything to do with inventories or demand if they don’t want it to..

at least for a while.

ekm's picture

Economy has literally stalled. Nothing moves. Oil is in tankers.


Bush at least was gentleman enough to make a great gift to Obama: Give the order to flood the market with oil from JPM tankers and SPR.

That's why oil went down to $35.


I've been saying it and I will say it again: WTI will go as low as $15 temporarily, after Obama gives the order to unload the tankers, very, very, very soon. There's no way around it. Economy is dead, literally.

forwardho's picture

Sept Baltic dry index crashed to 89' levels, it has not recovered.

The pipeline of raw materials to be used to create real value (products) stands at a trickle.

Industrial production has plummeted for all the big players.

This is reality, various permutations of CB easing do not create value, it creates an illusion.

Look to actual energy use for truth.

The truth is...

Our financial world has crashed, and living on make believe life support.

ekm's picture

Brilliant, simply brilliant.

fonzannoon's picture

Life support is a bad example. No offense. It's like watching he loud drunk guy at the bar knowing of he does one more shot he is gonna barf and drop dead of alcohol poisioning....Yet the damn guy keeps doing another shot.

Whiteshadowmovement's picture

And you know what his advice is about the best way to get rid of his hangover: "bro, i get up the next morning and I just rip another shot, hangover gone!"

Hey fonz lemme ask you something, whats the best book on investing youve read, every investor has a bible in one way or another, whats yours?

fonzannoon's picture

I have a 3yr old so my reading and free time has substantially fallen off. But I read the shit out of everything when i was younger. I don't really have an investing bible because I have ebbed and flowed over the years with my philosohies. So I never really ended up anchoring myself to one particular book or author.

I will tell you what my favorite book is overall though. "For whom the bell tolls". I can pick that book up any day. You?

ekm's picture

Read MARGIN OF SAFETY by Seth Klarman and you'd have no need to read anything else.

Just google it.

fonzannoon's picture

I know you have mentioned it a few times ekm. I do plan on reading that.

ekm's picture

Download it before it disappears.

fonzannoon's picture

funny I vaguely remember reading it cost like a grand or something.

Whiteshadowmovement's picture

For me its the opposite, I couldnt possibly name a single favorite book, but I consider the best (academic) book on investing ive ever read to be Expected Returns by Antti Ilmanen, a true financial genius who used to run Norways sovereign wealth fund

(dont let all the 'establishment' praise fool you, it is fucking brilliant this book)

fonzannoon's picture

To be honest (with both you and ekm)....5 years ago I would have went right out and purchased both books and had them read by next week. You know what I find to be the most successful investment method to investing is now? The monkey method. I have a set of companies that tend to consistently miss earnings. They get creamed. I wait a few days and then I grab them. A few weeks later they have drifted higher and I'm out. I'd like to tell you that I have got quite good at it, but then I remember that a handicapped monkey could do it too. So I try not to let it go to my head.

In all seriousness I make sure I stay sharp. But I am trying to chill and enjoy the little things a bit more now that the Bernak has everything on cruise control. I have some life vests just in case though.


Whiteshadowmovement's picture

Thats interesting because Ilmanen (who was also portfolio manager for the central bank of Finland) analyzes basically every single investment strategy over the past 100 years and the concludes what works and what doesnt. What you describe, momentum/trend is one of the clear winners over time. Value also works. The interesting thing is he also notes people tend to overpay for both high and low volatility. They also tend to almost always overpay for growth which is why its surprisingly a poor performer on the long term. One of the very best things about it is the analysis of how to judge risk premia for illiquid assets. 

check out this small interview or maybe read the first few pages on amazon if you have a free minute.

fonzannoon's picture

U picked one hell of a time to get involved on here and throw around heavy investing information. I've been on here for a while. I am seeing the threads on here almost all begin with FK YOU.....(insert politician/Bernanke etc)

I honestly cannot remember the last time I saw a thread of people trading actionable information on the stock market. Slaughterer seems like he has moved on. This site seems to be gaining in popularity and yet it is less about the market or investing everyday. It actually freaks me out a bit to realize I have not seen an investment thread on here in so long I can't remember.

Whiteshadowmovement's picture

lol, yeah thats what i was thinking that the other day... it really surprised me after I jumped in, because I didnt recall this site always being like this. I seem to remember there were useful and profound posts on here from time to time, but I have already in my short time here been rewarded with an automatic target for downvoting distinction so i guess thats speaks volumes about the current level of discourse here.

fonzannoon's picture

We all get serial junkers from time to time. The gold threads especially.going to watch that flick now.

Whiteshadowmovement's picture

you know what is interesting about Ilmanen's trend conclusions- The intuition behind the simple trend following approach is that while current market price is certainly the most relevant data point it is less certain whether the most appropriate comparison is the price a week ago or a month or a year ago.

So the use ofvarious technical rules beyond the very shortest time period (say, 50-100 days) is actually empirically established to give superior performance compared to long only investing

Whiteshadowmovement's picture

sick man, I cannot wait to get your take dude. That closing scene is a masterpiece

ekm's picture

Taleb calls this the 'turkey method'.

Turkeys stand proud until...thanksgiving day. The collapse will be swift. If you're caught with all your money in, you're screwed.


Klarman writes as to how not to be a prey to predators.

Whiteshadowmovement's picture

yea i know the black swan, ilmanen discusses this also in terms of the liquidity preference which can be seen as the obverse of the lottery-ticket tendency: investors overpay for both low-volatility and high-volatility assets.

Take the carry trade, the carry trade is a bit of a puzzle since it seems too simple to work. You would expect currency investors to demand a higher yield as compensation for the risk of depreciation. Countries with high interest rates are normally those with high inflation rates and you would think such currencies would lose value over time.

But the carry trade has been persistently profitable for around 30 years. On average, investors have pocketed the higher yield without suffering any effects from depreciation.

Why has it worked? Ilmanen argues that a carry-trade strategy is akin to the actions of the seller, rather than the buyer, of lottery tickets. In most circumstances, the strategy appears to be profitable but then, on a few occasions, the numbers turn out badly.

As a result, a carry trade tends to go wrong at the moment when most other risky assets (equities, high-yield corporate bonds) are also suffering. It thus has the opposite characteristics to the short-term Treasury bill. As a result, Ilmanen conjectures, investors demand a higher return as compensation for the risk they are taking on.


Also: "Volatility selling and carry trading are often characterized as “picking up pennies in front of a steamroller.” Even more important than the asymmetric payoff is the terrible timing of the rare losses. Because the steamroller tends to arrive at the worst times (financial crises, sharp bear markets), these strategies resemble selling financial catastrophe insurance. Based on the key insights of modern financial theory, investments whose losses tend to coincide with bad times warrant particularly high required risk premia. These two premia are closely related to equity market directional risk, especially in sharp downmoves, yet they are sufficiently different that they should be considered distinct return sources."

Whiteshadowmovement's picture

Hey ekm, ive also thought of downloading klarmans book but never got around to it (also heard mixed reviews in the vein of: you can save a lot of time and read benjamin graham) but id like to check it out for myself. Is it easy to find or can you post a link where to find it? Thanks

redpill's picture

More importantly, do they hungrily sniff the Pope's fresh poop like the Chinese Servants did for Pu Yi?

davidsmith's picture

This is the fate of asset inflation: deflation.  But only,of course, once the economy on the ground has been so decimated that you are talking about a complete collapse in demand.


Funny how that economy on the ground, keeps dragging you down!!!

BigPerm's picture

Where are the long gold vigilantes? or the mining vigilantes? let's try something different for a change.

forwardho's picture

Oh ho, me Bucko, don't you and I both think that would be just peachy

buzzsaw99's picture

the gold-oil convergence will be a bitch for goldbugz bitchez

redpill's picture

A number of countries are already using gold in petroleum transactions.  The west doesn't appreciate that much.  Dismissing it as "tradition" and a "barbarous relic" isn't quite working anymore.   Pretty soon owning gold will make you an America-hating terrorist.