What's Happening in Commodities is Just the Tip of the Derivatives Iceberg

The markets staged a weak bounce yesterday off the 126-day moving average (DMA). This has been “the line in the sand” for stocks for over the last two years.



However, regardless of this blip in market action, we’ve just staged one of the worst beginnings of a new year in recent memory.


For starters, in 2014, the single longest losing streak for stocks was three days. During that entire year, stocks never went down for more than three trading sessions without a bounce.


We’ve already had a five-day losing streak in 2015.


Moreover, as Bespoke Investment Group notes, the S&P 500 has not had a 1%+ loss on the first or second day of trading since 2008 (a year that featured a recession and collapse in stocks). And the last time the S&P 500 fell over 1.5% on the first or second trading day was 2001 (year that featured a recession and collapse in stocks).


We’ve had BOTH thus far in 2015.


All of these are very bad signs for stocks. However, the bigger news in the markets doesn’t concern stocks so much as it does leverage in the global economy.


Globally there are over $9 trillion worth of borrowed US Dollars in the financial system. When you borrow in US Dollars, you are effectively SHORTING the US Dollar.


Which means that when the US Dollar rallies, your returns implode regardless of where you invested the borrowed money (another currency, stocks, oil, infrastructure projects, derivatives).


Take a look at commodities. Globally, there are over $22 TRILLION worth of derivatives trades involving commodities. ALL of these were at risk of blowing up if the US Dollar rallied.


Unfortunately, starting in mid-2014, it did in a big way.



This move in the US Dollar imploded those derivatives trades. If you want an explanation for why commodities are crashing (aside from the fact the global economy is slowing) this is it.


Here is a chart of the inverted US Dollar (meaning when the Dollar rallies, the black line falls) and commodities (the blue line). Note that the commodity collapse tracked the US Dollar rally almost tick-for-tick.



This is just the start of a worldwide implosion. Globally there are over $555 TRILLION in derivatives trades based on interest rates. What’s happening in commodities now is literally just the tip of the iceberg.


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Best Regards

Phoenix Capital Research