Commodity Prices Are Cliff-Diving Due To The Fracturing Monetary Supernova - The Case Of Iron Ore

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

Crude oil is not the only commodity that is crashing. Iron ore is on a similar trajectory and for a common reason. Namely, the two-decade-long economic boom fueled by the money printing rampage of the world’s central banks is beginning to cool rapidly. What the old-time Austrians called “malinvestment” and what Warren Buffet once referred to as the “naked swimmers” exposed by a receding tide is now becoming all too apparent.

This cooling phase is graphically evident in the cliff-diving movement of most industrial commodities. But it is important to recognize that these are not indicative of some timeless and repetitive cycle—–or an example merely of the old adage that high prices are their own best cure.

Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking.

Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.

For that reason, the radical swings in commodity prices during the last two decades mark the path of a central bank generated macro-economic bubble, not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest.  Accordingly, the chart below which shows that iron ore prices have plunged from $150 per ton in early 2013 to about $65 per ton at present only captures the tail end of the cycle.

Iron Ore- Click to enlarge

Iron Ore- Click to enlarge

What really happened is that the central bank instigated global macro-economic bubble ripped commodity pricing cycles out of their historical moorings, resulting in a one time eruption of price levels that had no relationship to sustainable supply and demand factors in the mines and petroleum patch. What materialized, instead, was an unprecedented one-time mismatch of commodity production and use that caused pricing abnormalities of gargantuan proportions.

Thus, the true free market benchmark for iron ore is the pre-1994 price of about $20-25 per ton. This represented the long-time equilibrium between advancing mining technology and diminishing ore grades available to steel mills in the DM economies.

But as shown below, after Mr. Deng institutionalized export mercantilism and printing press prosperity in the form of China’s red capitalism in the early 1990s, iron ore prices broke orbit and soared to $100 per ton in the second half of the decade and then went parabolic from there. After peaking at $140 per ton on the eve of the financial crisis,China’s mad cap “infrastructure” stimulus boom after 2008 drove the price to a peak of $180 per ton in 2011-2012. To wit, iron ore prices peaked at nearly 9X their historic range.

Post 1994 Commodity Bubble - Click to enlarge

The crucial point is that there was nothing normal, sustainable or economic about the $180 per ton peak. It was a pure deformation of central bank credit expansion and the accompanying false pricing of debt and other forms of long-term capital.

Needless to say, the same thing is true of copper. Its historical benchmarks were in the 60 cents to 100 cents per pound range. Yet after 1994, the global bubble—again led by the enormous credit explosion and currency exchange rate suppression in China and its BRIC satellites—carried the price to  $4 per pound in the eve of the financial crisis, and then to nearly $5 during the peak of China’s post-crisis credit explosion.

Indeed, in the case of copper, not only was the cycle driven by unsustainable construction demand; it was also powered by dodgy forms of financial engineering that turned copper inventories into financing collateral that was sometimes re-hypothecated many times over.

The exact same considerations apply most especially to crude oil. China’s GDP grew from $1 trillion to $9 trillion during the 13 years after the turn of the century. Growth of such enormous proportions is not remotely possible in an honest economy based on productivity, savings, investment and sound money. Likewise, China’s call on the global oil supply system—-which soared by 4X from 3 million bbls/day to nearly 12 million—–is also a drastic aberration; it is a product of runaway credit creation that financed false “demand”.

And that was only the beginning of the aberration. The China engine pulled additional false petroleum demand into the world market equation due to the boom among its suppliers—such as Brazil, Canada and Australia for raw materials and South Korea and Taiwan for  components and parts. Output levels and petroleum consumption in Germany and the US were also goosed by China’s voracious demand for German capital goods and Caterpillar’s heavy machinery, for example.

Accordingly, the crude oil price path shown below reflects the same global monetary supernova. The $20 price in place during the 1990s was no higher in inflation adjusted terms than it had been one century earlier when the mighty Spindletop gusher was discovered in East Texas in 1901. By contrast, the 5X eruption to north of $100 per barrel during this century represents the impact of fiat credit and false capital market prices deforming the entire warp and woof of the global economy.

Self-evidently, we are now in the cliff-diving phase, but unlike the bounce after the September 2008 financial crisis, there will be no rebound this time around. That is owing to two reasons.

First, most of the world is at “peak debt”. That is, the ratio of total credit market debt to current national income ranges between 350% and 500% in every major economy; and that is the limit of what can be serviced even at today’s aberrantly low interest rates.

As Milton Friedman famously observed, markets are ultimately not fooled by the money illusion. In this case, the illusion is that today’s sub-economic interest rates will last forever and that debt carrying capacity has been elevated accordingly.

Not true. Short-term interest rates may be temporarily and artificially pegged at the zero bound by central bankers, but at the end of the day debt carrying capacity is tethered by real economics and normalized costs of money and debt.

Accordingly, the central banks are now pushing on a string.  The credit channel of monetary transmission is over and done. The only remaining effect of the residual level of money printing still underway is that ZIRP enables carry trade gamblers to drive financial asset prices ever higher, thereby setting up another thundering collapse of the financial bubbles being generated for the third time this century by the world’s central banks.

The second reason for no commodity price rebound is the monumental overhang of the malinvestments which have been made, especially since the 2008 crisis. That is obviously what is now pummeling the petroleum sector.

The huge expansion of high cost crude oil capacity—–in the shale patch, tar sands and deep off-shore—-was due to the aberrationally high price of oil and the inordinately cheap cost of capital which were generated during the last two decades by the global central banks. The above price chart for the WTI marker price of crude, for example, is what explains the eruption of shale oil production from 1 million bbls/day prior to the financial crisis to more than 4 million at present., not an alleged technological miracle called “fracking”.

However, the iron ore capacity expansion story is no less cogent. On the eve of the financial crisis, the Big Three miners—-Vale, BHP and Rio—had already doubled their mining capacity from 250 million tons annually at the turn of the century, to 195 million tons per quarter or 780 million tons annually.

Q production

But when prices soared to $180/ton in 2012, investment levels were drastically scaled-up even further. Currently, the Big Three have combined capacity of more than 1.1 billion tons annually that is not only in the investment pipeline, but is actually so far advanced that completion makes more sense than abandonment.  Accordingly, not withstanding the massive over-supply already in the market, several hundred million more tons will compound the surplus and drive prices even closer to the out-of-pocket cash cost of production in the years immediately ahead.

Curent n planned capacity

The above depicted capacity expansion is a quintessential reflection of the manner in which false prices in the capital markets drive excessive and wasteful investment, and cause the crash following the credit driven boom to be all the more destructive. So the cliff-diving price action here is not just another commodity cycle, but instead is a proxy for the fracturing global credit bubble, led by China department.

During the course of its mad scramble to become the world’s export factory and then its greatest infrastructure construction site, China’s expansion of domestic credit broke every historical record and has ultimately landed in the zone of pure financial madness. To wit, during the 14 years since the turn of the century China’s total debt outstanding–including its vast, opaque, wild west shadow banking system—soared from $1 trillion to $25 trillion, and from 1X GDP to upwards of 3X.

But these “leverage ratios” are actually far more dangerous and unstable than the pure numbers suggest because the denominator—national income or GDP—-has been erected on an unsustainable frenzy of fixed asset investment. Accordingly, China’s so-called GDP of $9 trillion contains a huge component of one-time spending that will disappear in the years ahead, but which will leave behind enormous economic waste and monumental over-investment that will result in sub-economic returns and write-offs for years to come. Stated differently, China’s true total debt ratio is much higher than 3X currently reported due to the unsustainable bloat in its reported national income.

Nearly every year since 2008, in fact, fixed asset investment in public infrastructure, housing and domestic industry has amounted to nearly 50% of GDP. But that’s not just a case of extreme of growth enthusiasm, as the Wall Street bulls would have you believe. It’s actually indicative of an economy of 1.3 billion people who have gone mad digging, building, borrowing and speculating.

Nowhere is this more evident than in China’s vastly overbuilt steel industry, where capacity has soared from about 100 million tons in 1995 to upwards of 1.2 billion tons today. Again, this 12X growth in less than two decades is not just red capitalism getting rambunctious; its actually an economically cancerous deformation that will eventually dislocate the entire global economy.  Stated differently, the 1 billion ton growth of China’s steel industry since 1995 represents 2X the entire capacity of the global steel industry at the time; 7X the size of Japan’s then world champion steel industry; and 10X the then size of the US industry.

Already, the evidence of a thundering break-down of China’s steel industry is gathering momentum. Capacity utilization has fallen from 95% in 2001 to 75% last year, and will eventually plunge toward 60%, resulting in upwards of a half billion tons of excess capacity. Likewise, even the manipulated and massaged financial results from China big steel companies have begin to sharply deteriorate. Profits have dropped from $80-100 billion RMB annually to 20 billion in 2013, and are now in the red; and the reported aggregate leverage ratio of the industry has soared to in excess of 70%.

But these are just mild intimations of what is coming. The hidden truth of the matter is that China would be lucky to have even 500 million tons of annual “sell-through” demand for steel to be used in production of cars, appliances, industrial machinery and for normal replacement cycles of long-lived capital assets like office towers, ships, shopping malls, highways, airports and rails.  Stated differently, upwards of 50% of the 800 million tons of steel produced by China in 2013 likely went into one-time demand from the frenzy in infrastructure spending.

Indeed, the deformations are so extreme that on the margin China’s steel industry has been chasing its own tail like some stumbling, fevered dragon. Thus, demand for plate steel to build dry bulk carriers has soared, but the underlying demand for new bulk carrier capacity was, ironically, driven by bloated demand for the iron ore needed to make the steel to build China’s empty apartments and office towers and unused airports, highways and rails.

In short, when the credit and building frenzy stops, China will be drowning in excess steel capacity and will try to export its way out— flooding the world with cheap steel. A trade crisis will soon ensue, and we will shortly have the kind of globalized import quota system that was imposed on Japan in the early 1980s. Needless to say, the latter may stabilize steel prices at levels far below current quotes, but it will also mean a drastic cutback in global steel production and iron ore demand.

And that gets to the core component of the deformation arising from central bank fueled credit expansion and the drastic worldwide repression of interest rates and cost of capital. The 12X expansion of China’s steel industry was accompanied by an even more fantastic expansion of iron ore production, processing, transportation, port and ocean shipping capacity.

On the one hand, capacity could not grow at the breakneck speed of China’s initial ramp in steel production—so prices soared. And again, not just in the range of traditional cyclical amplitudes. As indicated above, prices rose from $20 per ton in the early 1990s to $180 per ton by 2012—meaning that vast windfall rents were earned on the difference between low cash costs on existing or recently constructed iron ore capacity and the soaring prices in spot and contract markets.

The reality of truly obscene current profits and the propaganda about endless growth in the miracle of red capitalism, combined with the cheap debt available in global capital markets, resulted in an explosion of iron ore mining capacity like the world has never before witnessed in any mineral industry.

Stated differently, the Big Three miners would never have expanded their capacity from 250 million tons to 1.1 billion tons in an honest free market. Nor would they have posted such egregious financial trends as have occurred over the past decade. To wit, even as the global iron ore (and also copper) boom gather steam in the run-up to the financial crisis, the three miners spent $55 billion on CapEx during the four years ending in 2007.

By contrast, during the four most recent years they spent 3.2X more or $175 billion. Not surprisingly, the residue on their balance sheets is unmistakable. Their combined debt went from about $12 billion in 2004 to more than $90 billion at present.

But now, prices will be driven down to the lowest marginal cost of supply, meaning that Big Three EBITDA will violently collapse, causing leverage ratios to soar and new CapEx to be drastically downsized. In turn, Caterpillar’s order book will take a giant hit, and so will its supply chain running all the way back to Peoria.

 

So the collapse of the mother of all commodity bubbles is virtually baked into the cake. As one industry CEO recently acknowledged, his company’s truly variable, cash cost of production is about $20 per ton and he will not hesitate to keep producing for positive variable profit. That means iron ore prices will also plunge far below the current $66 per ton quote now extant in the market.

In short, when the classical Austrians talked about “malinvestment” the pending disasters in the global steel and iron ore industries (and also mining equipment and other supplier industries) are what they had in mind. Except none of them could have imagined the fevered and irrational magnitudes of the deformations that have resulted from the actions of the mad money printers who now run the world’s central banks.

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heywood2's picture

Whether commodity prices are rising or falling depends on which currency you use to track them.

If you are buying with rubles, commodity prices are rising sharply. Ha ha ha, suck it, Vlad.

 

kaiserhoff's picture

True, but there are some air pocket prices out there.

Looked at selling pine trees off some Florida property for pulp.

$11.00/ton DELIVERED.  How in the cornbread hell can you sell and deliver anything for eleven bucks a ton?

johngaltfla's picture

Shit, look at aluminum. It was the short of the year but my nuts are big enough to gamble on that one...

knukles's picture

Watch out below!
Historically....  Changes in the Adjusted Monetary Base of serious magnitude have done a pretty damned good job of leading similar changes in commodity prices, etc.
All's I say is Historically.
We're in a Liquidity Trap, so not everything follows the same rules ...

But do note that over the last 3 + months the base has contracted at a 30+% annual rate.

http://research.stlouisfed.org/publications/usfd/page3.pdf

That's a serious drain on funds from the banking system.
OK, lots of excess reserves out there been used by the banks for non-lending purposes....

BUT.  This is the same shit happened during the Great Depression.
Global Trade fell
Fiscal policy was moderated
Monetary policy was tightened.

And whatchu think happened?
Uh huh....
Severe contraction and plummeting prices.

Go figure

Well here... so's no guessing.
Interest rates plummeted, stock prices cratered and the now called EBT crowd expanded significantly, as GDP collapsed by some what was it, 25% to 35%? 

Add to that the oil price shock  (Think 1974, etc)
This time it's in the face of collapsing demand as the economies are soft and nobody's cutting production quick enough.

Commodity Prices gonna be going down.
Anything collateralized with that stuff's gonna be seeing big bad margin and collateral calls.

The Saudi's slicing the price of crude by 40% is right here and now, your Black Swan you all been looking for.

jcaz's picture

Best article I've seen that sums up the facade that China has created,  in collusion with the rest of the world, who so wants "the dream" to be true.

Poof.....

kaiserhoff's picture

Shit far.

What's counted in that base?  Domestic T bills and bonds?  and how is it shrinking that fast?

knukles's picture

It's the raw stuff that loans and investments are made of.  Like cash, Fed balances, etc. 

http://m.research.stlouisfed.org/fred/series.php?sid=BASE&show=info&

Once a bond, note of bill is purchased by a commercial bank, only a portion of reserves need be set aside against it, or same if a loan made.  So, if a reserve requirement was 1%, say, the $100 could fund $10,000 of earning assets on the balance sheet.
It's referred to as "High Powered Money"

Why contracting?
Because some of the bonds, bills, note, mortgages, etc., are maturing, rolling off and thus, when matured and not reinvested (on the Fed's balance sheet) the amount of High Powered Money contracts.  Just the opposite of when they buy stuff in QE.

Kaiser.... this is a massive contraction taking place.  Now, there's so much free reserves floating around the banking system that it's not causing securities to be sold or loans called right now, but NEVER has there been a contraction of this magnitude over a long period of time, a lot more than 3 months, NOT followed by very deleterious economic consequences... of both price and real economic activity contracting.

Herodotus's picture

It's just a pause before QE4 kicks in and takes it to a whole new level.

Cthonic's picture

http://research.stlouisfed.org/fred2/series/EXCSRESNW

Looks like someone(s) bet a cumulative $300B+ in excess reserves on Bullard, Oct 8 to Dec 10... sure must be nice to have a quarter trillion to push markets around with.

cnmcdee's picture

You don't  - look at beef prices.  Three years ago they fell off a cliff.  So everybody got out - except of course the big players that could wait it out during the shake em out.. So the little guys are all pushed out.  Now beef is through the roof, and the little guys of course seeing that there is money in it are all climbing back in. 

And the cycle repeats.  Now is the perfect time to get positioned to sell that pulp in about 2 years from now when the low prices have starved out all the little players.

JohnG's picture

 

 

That's my main business - trees.  The only way you make money is contract that production FAR in advance, and huge volume.  It costs basically nothing to grow the trees, but it will be 15-20 years between cuts.  Think hundreds of acres.

weburke's picture

alibaba and the forty thieves indeed.

we have seen peak china, and russia. Those that didnt flee the third world due to growth at home made a mistake

http://www.margaritaville.tv/player?mc_id=742

tplink's picture
tplink (not verified) heywood2 Dec 31, 2014 1:21 AM

my roomate's half-sister makes $65 /hr on the computer . She has been without work for 7 months but last month her pay check was $14940 just working on the computer for a few hours. you could try this out... www.works3.com

Bloppy's picture

Um, thought it was the Saudis? Ha Ha

 

Fishy attack on 'racist' House Majority Whip Scalise falls apart:

http://tinyurl.com/p9aseb5

 

kaiserhoff's picture

Cars made of aluminum and plastic. 

Seriously, did you ever close the trunk on a jap car?  Your pinky finger is plenty of pressure.

SelfGov's picture

Oh and I suppose Saudi Arabia is responsible for this too...

 

Debugas's picture

to put it short  - for the last 30 years we were living on consumer credit money which elevated all the prices all across the board.

 

What are the normal prices post consumer credit ? Nobody really knows but they are much much lower

NoDebt's picture

Agreed.  That's why it's called a DEPRESSION.  

Mentaliusanything's picture

A great article that shines the light on cause and effect from QE. When Money has it value driven down either by Zirp or simple debasement from printing then the resultant action is to chase hard assets. Perhaps Newtons third law applies.

You notice that when the QE was eased so did the prices bid. Now comes the Balance sheet correction that must follow and that will force a look at the forwrd PE of commodity companies. They have always been price takers and never makers so they have no escape from reality. Oil will make the biggest wave (think a Tsunami of deep over reach).

It is a pity that China inherited the Banking system of the West with its fatal floors but it is what it is, the biggest hangover the World will every experience and 2015 will be interesting times.

Equilibrium will be devastating but that is what deflation does

truehawk's picture

"Consumer Credit Money"  MY ASS.

Since 2008 95% of the money creation has been bankers lending to other bankers to play the market. Without Government Redistribution there would be NO consumer economy to speak of, because that is the "high powered money" of the rest of the economy. If the consequences for people were not so dire, I would enjoy seeing the government shut down entirely so I could watch all those that mouth off continuly about the imorallity of redistribution (1) loose their livelyhood they thought was not dependent on government  spending as they did in California in 1991 after the 1st Gulf War when HW Bush cut defense spending in California by 30 Billion.  It was only a cut of 30 Billion out of a 250 Billion dollar economy, so California was not all that concerned.  But then they found out that those 30 billion were the foundation half of the rest of the economic activity was built on.   

1,(as if the economic model that applies is kitchen table economics where the money can not be spent twice instead of Macroeconomics where one guys rent become another person's salery etc.)

spinone's picture

Since a large percentage of silver is recovered during the mining of copper and other metals, if demand keeps up this could be good for the silver price.

Greenspazm's picture

Iron ore - wasn't that the cargo on the "Nostromo" in Ridley Scott's "Alien"...

kaiserhoff's picture

Someone posted here a few weeks ago that Columbia is selling coal for $35.00/ton.

If true, you can see why the domestic companies are dying.

OpenThePodBayDoorHAL's picture

I heard Colombia was selling it that low too...

franzpick's picture

The monthly crude chart is showing you how much more oil is going down: try $42/bbl, off just another 20%:

http://www.investing.com/commodities/crude-oil-advanced-chart

Jack Burton's picture

Bravo David! Could not have said it better if I tried. " they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking."

We have NEVER been here before, NEVER, because of that, we can't know what is coming and how fast. But we do know an epic counter reaction to 2 decades of money printing is coming.

While David nails it for commodities. We can also consider the US Government, who lives off of money printing and King Dollar. We spend two dollars for every one dollar taxes bring in. Our government is TWICE as large as can be afforded. When that crashes, it takes 10 million jobs with it, as so many people owe their jobs to government spending. A 50% cut would cause over 10 million parasites to lose their government funded jobs. Like Drug Warriors, Secret Police, CIA and NSA spies, ATF agents, Home Land Insecurity guards, fuck, so many I can't even begin to think of tham all.

David is a voice in the wilderness of Media Lies. Media liars are all over TV, Radio, News Papers and Main Stream Internet Blogs.

Put David on CNN Money and let him tear those assholes some new assholes!

Ignatius's picture

"We have NEVER been here before..."

Which is why I tend a garden, plant fruit trees and have in mind a provision for chickens.

TheReplacement's picture

I'm gonna guess that the guys with guns will be the very last ones losing their jobs.

Rainman's picture

You mean Chinese commie captalizm is a complete fraud ? ... say it ain't so

Arnold's picture

They have had many Dynasty collapses.

We are only approaching our first.

Ewtman's picture

It's an obvious deflationary collapse to those willing to look at the world without rose colored glasses. The bubble has popped. Every asset class except stocks has succumbed to the deflationary pressure. But stocks are next. Their days are numbered...

 

http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...

TheReplacement's picture

And that is exactly why a lot of us believe there will be massive inflation.  If the bubble has popped then they must print moar.  That is the default corrective measure prescribed in the Keyesian bible. 

techstrategy's picture

David, I generally appreciate your articles,  but they are starting to feel like cover for TBTJ blaming everything on Central Banks (I know you've gone after the speculative carry trade madness).  The original sin always was fractional reserve banking and the inherent debt ponzi it engenders.   Central Banking just put it in hyperdrive.   The goal of the G3 Central Banks was to force China to end is currency manipulation, but WS used it to front run financial assets...

FWIW, oil is not like the others. Metals are recovered and recycled.   Buildings are long lived assets whereas oil is consumed short term and constantly needed to maintain quality of life.   Your analysis of China's oil demand growth lacks context.   The consumption per capita is still a fraction of ours.   To analyze oil,  one must look at the drivers (pun intended here).  We've dramatically reduced our oil consumption,  yet we still consume 17MM BPD.  We have less than 5% of the world population.   China now has more cars than we do.   Were it not for the US reserve status,  global oil demand would be HIGHER not lower.   

Oilcrashing's picture

Commodities are crashing at the same time they are getting harder to extract (thus their returns are getting lower, or even negative), how all of this makes sense?

This is the first sign that an economic implosion is starting to happen and that soon will be revealed that our debts will never be repaid (I mean, for the average guy, I suppose we already know here that debts will not be repaid). ZH and others have been following how a manipulated financial market struggles (even at ZIRP) to maintain the current illusion that everything is under control , that "there is nothing to worry about"...

However, we are going to see in the coming months the first signs of the financial implosion. Unfortunately, the system doesn't have too many options left as now:

"My concern is that we will start seeing a significant amount of debt defaults, both with respect to oil from shale formations and with respect to emerging market debt denominated in dollars. These debt defaults will send interest rates up. In fact, interest rates on junk bonds are already rising.

There are a number of ways that these rising interest rates could harm the economy:

1. Businesses, especially ones with low credit ratings will find it increasingly expensive to borrow. Some may drop out of supply chains, making it more difficult for businesses to make goods that require long supply chains. Business may fund themselves unable to make their usual products because supply lines are broken. This type of disruption could lead to a reduction in oil supply.

2. Consumers may find that higher interest rates make home buying more unaffordable. A cutback in homes sold will have a ripple effect on the economy, leading to fewer jobs in the construction work, and reducing prices on existing homes. Homeowners will have more difficulty selling their homes, because fewer people can afford the higher payments.

3. Student loans will become less affordable with higher interest rates.

4. Auto purchases will be cut back if interest rates rise, leading to less employment in making automobiles.

I don’t think we really have very long to get ready for a major economic decline. I would expect the economy to be fairly much affected as soon as a year from now."

Source:http://ourfiniteworld.com/2014/12/29/how-increased-inefficiency-explains-falling-oil-prices/#more-39471

Consuelo's picture

"Except none of them could have imagined the fevered and irrational magnitudes of the deformations that have resulted from the actions of the mad money printers who now run the world’s central banks"

 Nor would any of 'them' fathom the magnitudes of deformations that the central planners will undoubtedly engage in to prevent another deflationary event, becuase when you boil it down, we're not talking about just economics, we're talking about social 'deformation' in a very real sense.   This isn't David Stockman's parents generation we're dealing with here - polite and respectful of life & property, even in the face of abject poverty and desperation.   This is 'burn it all down man'...   Which is why, at the first whiff of a decline that rings something more than just 'temporary', QE will be back like a Juan Manuel Marquez counterpunch...

 

new game's picture

only play left in playbook-moar liquidity-bond(s)/ purchased(print)...

Mentaliusanything's picture

OR.... they could accept the Greenspan "Put" was the wrong diagnosis and the meds supplied by Ben Bernanke was way over dosed and given for too long. They Could accept responsibility and wean the World off the monetary Smack. They could accept that losses will be made against Bond holders and Banks assumed assets. They Could separate savings from the investment banks so at least there is some cash upon which to rebuild when the derivatives come a calling for payment. They could raise interest rates to let out a little steam out of equities and strengthen the Savers (note the word SAVERS)

They could accept that in the Natural World only the strong survive and the weak perish

They could and they should but they won't until the Patient is non responsive.

Then is the time.

jonjon831983's picture

"Iron-Ore Slump Fails to End Glut as Australia Mines Grow"

http://www.bloomberg.com/news/2014-12-28/iron-ore-slump-fails-to-end-glu...

 

Same sorta idea as oil.  Shift to low cost mines and the strongest survive ekeing out tiny profits with higher volumes while the rest collapse.

buzzsaw99's picture

...at the end of the day debt carrying capacity is tethered by real economics and normalized costs of money and debt.

BULLSHIT. There is no market, there is only old yeller.

q99x2's picture

Really liked this article.

DaveA's picture

Central banks can solve this problem the same way they reversed the housing collapse: Print more money, buy up surplus commodities, and never sell them. They could replace the Eccles Building with a great pyramid of solid steel.

zenon's picture

So David is talking about a return (in terms of pricing) to the pre-90's. Great. How does that stack up with money supply and the stock market being up by 5-6 times? Or does his forecast of things to come include a fall in the Dow back to around 3000? And what about the money supply (and other near-liquid aggreagated)? Will that shrink by 80% on account of bail-ins and what not? Or are will the holders of fiat currency or Treasury debt be the smart winners of the monetary supernova of the last 20 years with their real wealth having increased five-fold? Something just doesn't sound right in all of this.

techstrategy's picture

I agree.   Something is off in David's argument structure.   It is surprisingly incomplete compared to his great work of the past.   Oil is NOTHING like infrastructure commodities.   Nor has consumption gone parabolic.   His 100% focus on Central Banks of late feels like air cover for TBTJ.  I hope not.   I've always respected David's work. 

Carpenter1's picture

"Money" is debt, and debt will be wiped out, therefore money will be wiped out. That's how you get to a depression. Our money has no intrinsic value, therefore it can vanish in the blink of an eye, and it will.

This is what all the believers in the FED are missing, even the ones on ZH.

Conax's picture

I like how the author never once lumped silver in as an industrial commodity. I was watching for that, it happens every time. But not here.  Good job!

new game's picture

this the limit, used to be 350 percent, but with basic zirp affected bond rates, we are at the point of decent.

incomes topped at flat, only option to print and extend, but time is running out. oh, yellen will not be raising rates, that is just plain not gonna happen. she is talking a strong econ based on fairy dust printing. stockman for prez...