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How Did We End Up Here?
Submitted by Sean Corrigan via True Sinews blog,
While money can be made in markets on the minutest of scales, sometimes it helps to have a broader sense of perspective. After all, if you can’t locate yourself on a map – without the aid of GPS, children! – you don’t know where you are and if you have no grasp of history, you don’t really know who you are either.
So, focusing on commodities in this instance, we here use the monthly IMF price report to construct an overall index composed of energy, ags, base and precious metals by blending them with the typical sort of weightings favoured by the major tradable indices of today.
As can be seen from the graph, commodities – priced in the dollar of the day over the last four decades of floating exchange rates and unanchored policy – form a neat, symmetrical pattern when plotted on a log scale (on which equal percentage, not arithmetical, moves have the same length). At the bottom left lies the substantial, two-stage rise in prices which finished by defining the upper and lower bounds of what would turn out to be a 33-year central value area, This took place, as needs little recounting, over the course of the two Oil Shocks of ’73-4 and ’79-80.
A long decline followed that first peak, one punctuated both with the 1986 oil crash – from which many are drawing a chastening lesson today – and with the spike which attended Saddam’s invasion of Kuwait and the First Gulf War, before the move came to an end in the chaos of the 1998 Russian bankruptcy and the climax of the shattering Asian Contagion.
From that nadir, we have lived through the so-called ‘Super-Cycle’, whose salient features were the run to near $150/bbl oil in 2008, the ensuing financial collapse, and the Great (Chinese-led) Reflation which followed. Three years were spent zigzagging lower in a narrow corridor thereafter – during which ags hit their highs, metals ground ever lower, and silver and gold each made record highs before going into their own, separate tailspins – then came the dramatic, front-led breakdown of the energy complex, the last resort of the commodity bull to that point, a man who luxuriated complacently in a narrowing range, falling volatility, and a then-remunerative inverted (‘backwardated’) forward curve.
From here, the question is whether the current uptick is any more than a bout of short-covering which is doomed to relapse and print new lows once the overstretch inherent in an almost uninterrupted 60% plunge is worked off, or whether some more meaningful recovery can be staged. We still have our doubts about the latter outlook and would watch for behaviour near the 2009 low and the old range high (or in terms of the most heavily weighted of the constituents, crude oil, whether it will hold above first $40/bbl then $35).
If not, we face the possibility of a reversion to the mean/mode of that 1974-2005 band at a level loosely corresponding to $20/bbl oil.
Courtesy of Bloomberg
Of course, the foregoing discussion has all been conducted in nominal terms – that is, without allowing for the general decline in the purchasing power of the dollars in which the index is measured (itself something of a tail-chasing concept since we calculate that same depreciation by looking at how much ‘stuff’ a dollar buys today compared with yesterday and some of that same ‘stuff’ is energy itself, so this recalculation inevitably contains an inseparable mix of relative and absolute prices changes).
We choose here to make the adjustment not in terms of that often rejigged and housing-heavy basket of goods, the CPI index,, but in terms of what that aristocrat of the labour force, the American manufacturing worker, can buy with an hour’s worth of his time on the assembly line.
Once we make the necessary reckoning, the long decline over the last quarter of the last century is thrown into an even starker relief. It also becomes clear that the rise from the secondary, post-9/11 low to 2011’s reflation peak lasted almost exactly as long as did the first great lurch higher and that it reached its apogee at almost exactly the same height as did its forerunner.
Here, we would note that, while trading below the 1990 spike and/or its nearby fib level, the distribution’s mid and the 2008 lows look well nigh unavoidable from a technical perspective.
Having adjusted for the dollar one way, let us now do so in another. For the world beyond America’s boundaries, it matters not a jot if the dollar price of corn or cotton goes up by 10% if the greenback moves a similar proportion in the opposite direction in terms of the local unit of exchange. In order to isolate the history of price changes from the worst of this effect, the simplest – if very approximate – operation is to multiply the index by the trade-weighted value of the dollar and so we do.
Here, too, we can see how clearly delineated was the ‘Super-Cycle’ – i.e., that coincidence of China’s ‘opening up’ and the Europeriphery’s enjoyment of cheap German finance with a sustained spell of preternaturally low interest rates around most of the world (rates which now, of course, seem unattainably lofty!). the ‘Committee to Save the World’ has a lot to answer for!
We can also see just how decisive the last six month’s break has been and note that technicals, at least, offer little support for something still so historically elevated and presently so remote from any momentum-sapping area of well-populated precedent.
Finally, since only very few participants in our markets buy commodities for their own sake, but rather do so with a nod to the Modern Portfolio Theory superstition of ‘decorrelation’, we offer up a graph of commodity prices (not returns) versus stock prices (not returns). Now it is the various highs and lows which seem to define an all-encompassing, downward-sloping channel of chronic underperformance.
Within this long, gloomy run, we can identify two periods of relative commodity glory of roughly equal extent and duration, spaced some thirty years apart. The first occurred during the Great Inflation which bracketed the break-up of Bretton Woods and the first fumblings toward its replacement monetary order, the Age of the Independent Central Bank (reverentially capitalized, of course). The second, one might contend, coincided with the end of the so-called Great Moderation which followed and – we would suggest – with the ongoing transition to a new and yet unspecified era wherein the follies and failings of our generation of manically-active, inveterately hubristic, printing-press central planners will be utterly repudiated in its turn.
Ask not for whom the Bell Tolls; it Tolls for QE.
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Infinite debt in a finite system is a bitch for central banksters.
QE to death until your currency collaspes.
Trillion dollar platinum coin time, then hyperinflation time...
My Grand-Mothers' co-worker's sister-in-law makes $9.15 /hr on the internet . She has been out of a job for 19 years having babies, but last month her check was $33,337.39 just working on the internet for a few hours a day....... visit the site www.krugmans-beard.com for the details.
Unlike interest rates which can now go below zero commodity prices can only stay fractionally above zero
And the last time the IMF made an accurate forecast was .............?
What a colossal crock of simmer'n cow crap
I've been calling a 25/barrel bottom for a long time now, since the underlying economy is tanking and many producers will try to make up the loss of revenue by pumping as much as possible, which will exacerbate the problem. However, now that the IMF is saying 20, coupled with Goldman calling for lower proces(probably setting up some muppet slaying) maybe I am wrong.
i lovz me gold, but this analysis tells me cash may be better for now. Gold has held up in oil's fall from $100 to $50, but if oil goes to $20 I presume gold will test $1000/oz
there's only so much elasticity in the gold/oil ratio (unless the Feds/banking cartel release the bottleneck stopping QE from flooding the real economy)
I would rather eat cow crap than have the shit storm they are brewing. The things are they are doing will be talked about for 500 years in the same breath as the tulip mania and the south sea company. It is so obvious how clueless and corrupt the financial regulators(government are bought and clueless to the harm being wroth) have become.
Considering all that has been printed, shouldn't we already have hyperinflation?
I'll wait patiently for your answer as I've waited for other hypperinflationist to answer. Still haven't gotten a reply.
As above. Transmission mechanism is broken, or otherwise said, there's a severe bottleneck . The nature of the QE prevents much of the monetary base increase from getting outside financial assets.
But you can be absolutely sure when the SHTF that they will change gears and use genuine helicopter money that goes straight to main st, and that will absolutely be inflationary
On an existential level, what will we ZH’ers do when the whole system implodes? Obviously, there will be mayhem, etc -- but what about the entertainment level lost from ZH? The Blogging at the end of the articles, is almost better than the actual content. On some level, when the world economy crashes, and true market equilibrium is again established, ZH will no longer have a purpose. Hell, I might even get a TV again. I have been following since the beginning (of ZH) and just recently joined so I can comment too (I realized that we don’t have much time left together and I wanted to participate). This site has its faults, but overall, fresh perspectives, intelligent people, and best of all -- an incredible sense of humor. Thanks for being there for me ZH community -- you make me feel less alone in a profoundly apathetic and idiotic world.
Sincerely,
Confederacy of the Dunces.
Quite frankly,
I think most ZH including myself won't be on Zh or the internet at the tiime. When the SHTF (really), you'll be fighting looters or the government itself.
The 1% will be safe watching the show while the rest of us are fighting for our lives. I couldn't give a crap about the entertainment. I don't need Zh for entertainment. I come to ZH hoping to find others that see how serious the problem is.
A reset is just that, a reset so that all the crap starts over again. I want something different. While other soley blame bankers, I suggest the commonality is government as the problem. Yet, society needs some sort of structure to avoid total chaos. So what is the answer? I don't know and I ask others for ideas.
Sessinpo,
Yes - Obviously, if things go bad that fast, I will have my bug-out-bag, grab the family, and be gone like a puff a smoke. You do have to admit -- and I used to be that guy -- that being so fucking serious all the time about the world ending is a bit fascist. If you look through history, corruption and failed economic policies is not a novel idea! People, errrr, the proletariat survive and move on -- always. So, if you cannot laugh a little (at yourself), then what is the point of surviving? Are you going to holed up, scared, straight-faced, and indignant. Myopia is not a pliable life philosophy. I dare you to laugh today.
COTD
small tightly knit local self sufficient communities. Treehugging hippies and redneck hunters will soon find out they have more in common than iether has with suburban zombies
Dallas is going to have a whole lot of empty buildings if oil hits $20/bbl.
Even more in North Dakota. :(
I know people from North Dakota who are starting to come back. Sad, some of them took family with them.
Going to see some eerie ghost cities start popping up across the northern plains.
Alberta.
I went through calgary last summer for the forst time and i was supper impressed with massive growth and clean new buildings. There were alot of philiipinoes that imigrated there for service jobs, i did not sense any issues then as oil had not went in free fall mode and i was paying near $7 gal gas while driving through canada. I was thinking calary would be nice place to move to.... Now i see that the massive growth and optimisum is not sustainable. Should have known then but when your in it you get swept in by the warm good feelings.
Global economy crumbling? Check
Deflation setting in? Check
Oversupply pouring from everywhere? Check
Yep, oil is on it's way back to $100 any day now.
Here's the deeply fucked part: $100/bbl is cheap when you consider how dependent civilization is on the energy density of that black shit and that it is in any practical sense a finite resource (at least via reasonable means that don't impact our living environs in a deadly way) through which we are burning at a rate that would make a cicada swarm devouring crops looking fucking lazy by comparison.
When 9 billion can't get enough to eat because there's no petrochem fertilizer product to make their GMO seeds grow too fast all those Hummers won't seem quite so impressive other than being relatively rain-proof.
It's going to be extremely interesting (assuming no hungry hordes at the door) to see how this all plays out. Normal supply/demand dynamic suggests that once this shale boom is used up and the rest of the super-giant fields continue to have lowered pump rates due to depletion that oil will return to $100-$150 barrel making tar sands and other third-tier glop economical to burn thereby reestablishing the oil industry and moar growth.
But I expect the actual crunch is going to play out very differently with deflation causing dry-rot to spread through the economy. We could end up with your scenario above but with oil at $45. Of course, sooner or later, inflation will come back with a vengeance but at that point it's anyone's guess where oil will be or what pricing in dollars will even mean.
Good read on why oil won't ever hit $500/bbl. http://www.peakprosperity.com/forum/why-peak-oil-will-never-lead-500bbl-...
I was up until 1:00 am this morning listening to all 26 parts of THE CRASH COURSE on www.peakprosperity.com and I would recommend that all ZeroHedger's listen to it. I learned a lot and the truth is frightening.
amen!
what is the value of oil?
right now about $53
seems cheap, i can't get a chinese takout for 4 people for that, but i can buy a 128 litres of oil?
seems like a bargain to me
if i had somewhere to store it i'd gladly convert most the cash i have in to oil. it's a safer bet for future sale in £s or haggle power
even better if i could buy long term storage tankers of ready to roll petrol or diesel
they may not roll anymore,but they are big enough to live in comfortably
Why? Exxon Mobile was already moving to The Woodlands. I'm in downtown Dallas right now. I don't know anyone that works for an oil company downtown.
My bad, I meant Houston.
http://www.wsj.com/articles/falling-oil-prices-threaten-houston-building...
1/6 of all commercial real estate under construction is in Houston. That's mind boggling and won't end well.
If Downtown Dallas has empty buildings, I'm buying. Houston, Fargo, and Calgary on the other hand...
we ended up here one day at a time..
"Slowly and then all of a sudden."
Just let all the producers of commodities go bust. Many are already on the brink and stare into the abyss. Then what? 7.2 billion people would still like to eat something. Or maybe that is the game plan, their way to deal with the human population bubble? Nothing but bad choices and tough decisions left here IMHO. If commodities stabilize and go up, inflation will kill the rest of the middle class. If deflation takes its course, same thing due to shortages. Nothing good coming down the pike here, but that is nothing new to people round here.
today i need to give $53 for one barrel of wti (£34.40)
i predict in the futre i will need to give more than £34.40 to get somone to give me a barrel of oil
i'm not sure what 1972 has to do with it, or the square root of ganns favourite meal on a chinese menu
or if leonardo think the proportions are right
i just think today i can buy a barrel for £34.40 and at some point some guy will give me more for it
because i don't have to borrow to fund the £34.40 i'm not upset if the next few guys to show up only offer me £30
if someone turns up with a pink £50 they can have the oil and i'll take the £50 for a bottle of veuve
When there is a major shift in the fundamentals historical data becomes useless.
Deep sea and shale oil extraction show that cheap oil no longer meets demand.
BUT ..... if the global economy continues to crash then cheap oil may meet demand.
The oil price could go in any direction ........
I'm not sure if I would log-scale an inflation-adjusted measure. That's what the log-scale was for.
exactly
and who's inflation measure do you use?
we brits buy oil and so do people in portugal and tazmania
we all experience different inflation rates yet all have to pay the same amount for the oil
seems like analysis paralysis to me
i remember when pork futures went through the roof because the chinese and russians started to get in to the stuff (scratching for the russians apparently)
chart that mother******
Most here believe we're headed for an economic crash, but oddly, some think we'll have $100-$150 oil still.
Those two don't reconcile well.
For most of human history commodities were really expensive and labor was really cheap. There is also no way to compare the standard of living for most of human history to today's standard of living.
Perfect time to buy a motorcycle. Winter prices. You can escape the masses if you get an enduro and imagine turning gasoline for the vehicles into gold bitchez. Strap a pair of my Jesus slippers on the side and I'm good to go.
maybe look into a diesel bike, just in case gas is short. You could run it on vegetable oil;
http://www.dieselbike.net/currentconversions/currentconversions.htm
It may not matter 'a jot' to a commodities trader if the price of corn goes up 10% while the dollar goes up 10%, but an American food processor buying American corn with American dollars has just seen a 10% increase in corn and corn syrup - and those costs get passed on to American consumers. Fortunately, those costs are not in the CPI because the Fed says so -- meaning the food processor does not have to pay employees higher wages. Multiply this times many other commodities and soon the pattern is higher consumer costs, no wage growth, and a stagnant economic recovery -- sort of like -- NOW!
Hence: EBT/SNAP/etc
but is the $20 of 1974-2005 still $20 today?
Hardly, a new tricked out 1975 camaro was $6500 and a new tricked out Corvette was $9800.
Nope it sure is not. How about this my 1964 paper dollar will buy me 1/2 gallon of gas today 2 1964 silver half dollars will buy me over 6 gallons of gas. But alas the Fed would have you believe that silver is not real money
No and the changing economics of the industry are something an awful lot of ZH denizens miss. E.g.: in an old field I operate I, today, require X gross bbls of production to pay back the cost of drilling & completing a new well. Fifty years ago, in the same field on the same leases, the operator at the time required 23X gross bbls to pay back the cost of drilling & completing a new well. It's never been easier to make a buck in this business ... even post-crash.
1. Scarcity? More oil will be located or pseudo-oil produced by bio-fuel synthesis ala ethanol or via Fischer Tropsch process in conjunction with salt/thorium reactors. There are alternatives.
2. The oligarchs and crony-capitalists that command rents from the present energy infrastrructure don't want change as it might destabilize their income streams. These people are only too happy to jack prices to the moon where extraction infrastructure already exists such as the Saudis. They are only too happy to wreak environomental damage if it enriches them in the present even if there is no plan to clean up any damage incurred in the future... IMHO, there is a large component of sociopathy running amok in the energy production/oil etraction secrtor...
3. IMHO the the issue of price is a big fat red herring distraction. The price is far above the median. The only time anything statistically like the last decade occoured was during the so-called Oil Shock. I don't think that the 'leadership' in the US and EU have the balls to own up to the fact that another Oil Shock has been underway in direct response to their opressive policies of money printings, failed institution proppings, and imperialist military aggressions.
4. IF trillions of dollars had not been blown on destructive wasteful foreign wars and on repressive wasteful police/security state infrastructure that funds could have been allocated to vast energy sector programs on par with the perceived need. There should have been a Marshall Plan/NASA is gonna put men on the moon size domestic undertaking at the very least if not an international cooperative program a scale of magnitue larger. IF energy security is so important and energy independence is so very god-damned important then what excuses are there for deviating from these objectives and wasting trillions of dollars on zero-sum gain surveilance infrastructure and military adventures in distant lands?
1. You must be a Denninger devotee. While I agree we could be unlocking vast sources of energy had we kept up nuclear research and funding, the reality is it's highly unlikely we'll see a single commercial thorium reactor in the US in our lifetime.
2. There's sociopathy throughout our government and wall street. It's pretty much requisite.
3 / 4 - Ethanol from corn is stupid. It's a handout to farmers from the feds and frankly a waste of topsoil. Biofuels are still nowhere near production ready and it's highly questionable whether they scale to the 20M barrels/day we currently drink. As to military adventures, how else is Halliburton or KBR going to make a profit? Hell, man, there's a long list of bases and weapons that the Pentagon says it doesn't want but Congress won't let them be shuttered because it's pork for their people. D-FENCE!
The folks you're whining about in #2 are the ones who will own #1. It may be the proletariat that is pressed into service buillding them but they sure won't be the ones who wind up owning those lines of those thorium reactors.
.
Society has been here before.
November 22, 1963
IMO, attempting to set up and analyze a complete commodities index is an exercise in futility. This is because various groups of components are influenced by completely different causes. Ag commodities are primarily influenced by the weather. Precious metals by central bank policy, etc. An index produced by the prices of iron ore and copper would be more useful, even though these are also subject to manipulation.
Folks looking for ideas on how to cope with an economic collapse should consider what occurred during the collapse of the Soviet Union 1989-95. Orlov is a good source. The US, being less centralized, will retain state-level governmental authority for some time. But these, with their police agencies, will probably become very fascistic. The key is community and family autonomy, with mutual self help.