Popping Rivets

The Dow rose 110 points on Thursday to settle at 17,972. It seems to be struggling with the 18,000 milestone, as though some inner voice were telling it to beware.

An inner voice is telling us to beware too. It’s impossible to know what will happen next. All we can say with any confidence is that something will happen. Probably something alarming.

Everywhere we look we see rivets popping …

 

oil-pump-51658_1280

 

Global Output Shrinks

The Baltic Dry Index has just put in a new all-time low. The index measures the cost of shipping raw materials over 23 sea routes.

 

1-BDIThe Baltic Dry Index – shipping has become suspiciously cheap – click to enlarge.

 

As world trade sinks, so does the index, all other things being equal (which, of course, they never are). Bank of America Merrill Lynch says global GDP may fall by $2.3 trillion in nominal terms (that is, before adjusting for inflation) this year.

To put that in perspective, nominal global GDP has only fallen five times in the last 34 years. Meanwhile in the US, sales are weak. New building permits are weak. And income growth is weak.

And over in Europe, talks have stalled between Greece and its creditors. We rate the chances of a “Grexit” at about 50/50 in the short term… and closer to 80/20 in the long term. What that will mean exactly nobody knows … but it’s bound to mean something.

Most likely, it will mean an even lower euro versus the dollar. And maybe a collapse of euro-denominated sub-prime government debt. The question is: What will the sovereign bonds of Portugal, Spain and Italy be worth after Greece defaults? Won’t bondholders start to get nervous that a domino effect may be under way?

The European sovereign debt market is bigger than the US mortgage market. When it cracks, there are sure to be fireworks. Because there are some $26 trillion in derivatives tied to it.

 

2-Italy-10-year-yieldItaly’s debt has continued to explode, but the market’s perception of its “sustainability” has been altered dramatically by ECB intervention – click to enlarge.

 

Citigroup’s Oil Bombshell

The falling price of crude oil was first thought to be a good thing. Consumers could spend less on gasoline. But a 60% drop in the price of the world’s most important commodity can’t happen without major disruptions.

A lot of investment decisions had been based on oil selling for over $75 a barrel. Now that it’s trading at about $50 a barrel, there’s $25 missing from every barrel sold. That’s $25 that isn’t being used to drill new wells, hire new roughnecks, buy pickup trucks or rent office space in Houston.

Speaking of which, one-sixth of America’s new office space is under construction in the Houston area… and prospective tenants are becoming hard to find. They might even become scarcer if Citigroup’s new forecast for oil turns out to be correct. It sees the price of oil falling as low as $20 a barrel this year:

 

“The oil market should bottom sometime between the end of Q1 and beginning of Q2 at a significantly lower price level in the $40 range – after which markets should start to balance, first with an end to inventory builds and later on with a period of sustained inventory draws.

It’s impossible to call a bottom point, which could, as a result of oversupply and the economics of storage, fall well below $40 a barrel for WTI, perhaps as low as the $20 range for a while.”

 

What would happen if oil fell to $20? We don’t know. But already 90 rigs are closing every month. There are bound to be consequences – seen and unseen – of a further drop in the oil price. And they’re not all going to be good.

 

3-WTICThe ups and downs of crude oil over the past 15 years – the last time prices at $20 were seen was in 2001/2002, about 6 months before the post Nasdaq bubble bear market in stocks bottomed out – click to enlarge.

 

Houston Times 100 …

Overbuilding is a minor problem in the US. In China, it is huge. It is Houston times 100. Since 2008, China has increased its money supply by more than threefold. And much of this new money helped fuel a real estate boom in China’s tier-one cities.

Now, the property sector accounts for one-quarter of the Chinese economy, according to Moody’s Analytics. When that bubble bursts, at lot of folks who issued mortgage credit will get hurt too.

Another big seam is coming loose in the currency markets. At the end of last year, the US passed the baton of money creation to the Japanese, Chinese and Europeans. In a free-floating currency world, this has pushed up the exchange rate of the US dollar to levels that are causing stress and strain on the entire system.

Here again, the first reports of a rising dollar were greeted with good cheer, at least in the US. Americans thought they had won the World Cup. But wait… There’s someone on the other side of every transaction.

For most of the world, a higher dollar acts like a corporate-tax increase. The dollar is the world’s reserve currency. That means people all over the world need to convert local currency into dollars to do business. A higher dollar means higher costs.

For Americans, it is like an export-tax increase. As the exchange value of the dollar rises, it pinches off America’s industrial renaissance. Along with the decline in shale-oil investment, that will mean fewer jobs in the US, less revenue to US companies, and darkening skies over the Northern Hemisphere.

The greenback is the sun around which other currencies are supposed to orbit. It is the fixed point that determines night from day, winter from summer, profit from loss, solvent from broke.

What happens when the sun begins to wander? Well, that’s what we’re beginning to find out. Expect more volatility ahead.

 

4-DXYUS dollar index, monthly. At the moment, this is a suspiciously bullish looking chart – click to enlarge.

 

Charts by: StockCharts, BigCharts

 

The above article is taken from the Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

3 Responses to “$20 Oil?”

  • The need for sell oil for cash flow and the capacity to store it are bigger determinates than demand. The price of oil itself could cause a downturn. Mexico sold a lot of oil to pay the loans it took out to develop the reserves in the first place, back in his 1980’s. Imagine the effect of a pawn shop and having a Rolex watch. Rolex equals money, though it could be much less than it cost.

  • Hans:

    You are going need a recession or a govcession to secure $20 goo; or perhaps a very
    weak global economic growth..

    The intra day low of $43 might be the low or a decline to the $35 range…A recession in
    Red China would have a material impact on the price of crude.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 21st Century Shoe-Shine Boys
      Anecdotal Flags are Waved   "If a shoeshine boy can predict where this market is going to go, then it's no place for a man with a lot of money to lose." - Joseph Kennedy   It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if...
  • Christopher Columbus and the Falsification of History
      Crazed Decision The Los Angeles City Council’s recent, crazed decision* to replace Christopher Columbus Day with one celebrating “indigenous peoples” can be traced to the falsification of history and denigration of European man which began in earnest in the 1960s throughout the educational establishment (from grade school through the universities), book publishing, and the print and electronic media.   Christopher Columbus at the Court of the Catholic Monarchs (a...
  • The Forking Paradise - Precious Metals Supply and Demand Report
      Forking Incentives A month ago, we wrote about the bitcoin fork. We described the fork:   Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!   BCH, son...
  • The Government Debt Paradox: Pick Your Poison
      Lasting Debt “Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”   Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT] Photo...
  • The United States of Hubris
      Improving the World, One Death at a Time If anyone should have any questions about whether the United States of America is not the most aggressive, warlike, and terrorist nation on the face of the earth, its latest proposed action against the supposed rogue state of North Korea should allay any such doubts.   Throughout history, the problem with empires has always been the same: no matter how stable and invincible they appeared, eventually they ran into “imperial...
  • India: The Genie of Lawlessness is out of the Bottle
      Recapitulation (Part XVI, the Last) Since the announcement of demonetization of Indian currency on 8th November 2016, I have written a large number of articles. The issue is not so much that the Indian Prime Minister, Narendra Modi, is a tyrant and extremely simplistic in his thinking (which he is), or that demonetization and the new sales tax system were horribly ill-conceived (which they were). Time erases all tyrants from the map, and eventually from people’s...
  • Long Term Statistics on AAPL
      Introductory Remarks by PT Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of...
  • Tragedy of the Speculations
      The Instability Problem Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future. In fact, it is not.   A tragedy... get the hankies out! :) [PT]   Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:   "Crypto is so...
  • Despite 24/7 Trading: Bitcoin Investors are Taking off for the Weekend on Friday Already
      Crypto-Statistics In the last issue of Seasonal Insights I have discussed how the S&P 500 Index performs on individual days of the week. In this issue I will show an analysis of the average cumulative annual returns of bitcoin on individual days of the week.   Bitcoin, daily. While this is beside the point, we note the crypto-currency (and other “alt coins” as well) has minor performance issues lately. The white line indicates important lateral support, but this looks to...
  • Precious Metals Supply and Demand
      Fundamental Developments There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30. Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.   Gold and silver prices in USD terms (as of last week Friday) - click to enlarge.   Next, this is a...
  • To Hell In A Bucket
      No-one Cares... “No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.” We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.   The federal debtberg, which no-one cares about (yet). We have added the most recent bar manually, as the charts published by the Fed will only be updated at the end of the...
  • Precious Metals Supply and Demand
      Back to the Happy Place Amid a Falling Dollar The prices of the metals dropped this week, $24 and $0.38. This could be because the asset markets have returned to their happy, happy place where every day the stock market ticks up relentlessly.   Sometimes, happiness is fleeting... - click to enlarge.   The major currencies have been rising all year—we insist that this is a rise in these dollar derivatives, not a fall in the dollar—and this is a risk-on pattern....

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com