Dear Diary,
A faint breeze blew through the US stock exchanges yesterday. A few leaves fluttered.
But Diary readers want to know: When is the next hurricane coming?
Alas, we get the newspaper no earlier than anyone else. It always has yesterday’s news… not tomorrow’s. That leaves us wondering and guessing and trying to figure out what comes next.
The storm that raged in 2008 was fundamentally deflationary. It was so predictable that we didn’t need tomorrow’s headlines; the weather forecast was obvious.
After decades of taking on debt, Americans started to stagger under the weight of their debt-service costs. When house prices fell, their knees buckled and their backs broke.
Households cut spending and reduced borrowing. But they are still heavily in debt. In 1971 – before the big credit bubble began inflating under the new fiat currency regime – American households had $5 of income for every $4 of debt.
Now, for every $5 of household income they have $12 of debt.
That’s down from the “peak debt” of 2007 – at $13 for every $5 of disposable income – but still much more than the historic average.
Mr. Government vs. Mr. Market
The feds’ response to Americans’ prudence was also predictable. After so many years of backstopping the stock market… and luring consumers and businesses deeper into debt… the feds weren’t about to quit.
Besides, their theories told them this was when their help was needed most.
This put Mr. Government and Mr. Market on opposing sides of the big blow. The feds whip the winds up from the South. Mr. Market sends them blowing down from the North.
The feds want inflation; Mr. Market wants deflation. The feds want more credit; Mr. Market wants debt paid down. The feds send down torrents of liquidity; Mr. Market mops them up.
This leaves the economy in the eye of the storm – where all is quiet.
Black Friday was a disappointment for retailers; but the pundits say this was because so much shopping is now done online. There are fewer real breadwinner jobs; but the pundits say the unemployment rate is down. The economy is sluggish; but pundits say the stock market reports clear sailing.
Dark Clouds and Fierce Tornadoes
But beyond this scene of calm the pundits are painting are the strong winds…
Zero-interest-rate policies… quantitative easing… deficit spending – all are meant to offset Mr. Market’s dark clouds and fierce tornadoes.
If Mr. Market weren’t in such a destructive mood, these measures would have already sent interest rates and inflation soaring skyward… with the Dow flying to 25,000… gold soaring to $3,000 an ounce… and $5 for a Big Mac.
And if the feds weren’t so determined to stop him, Mr. Market probably would have knocked the Dow down to about half of where it is today. He would also have crushed half of the major Wall Street firms. And you’d probably be able to get a Big Mac for $1 – with fries.
Who will win this contest?
In the end, Mr. Market will triumph. He always does. He represents the forces of nature… and the gods.
He is the fellow who keeps trees from growing to the sky… who forces prices back to the mean… and who never gives a sucker an even break.
And that bell you don’t hear ringing at the top of a market? That’s Mr. Market not ringing it.
Regards,
Bill
Saudis Launch Another Attack on Oil
The news for crude oil bulls just got worse…
The House of Saud is on the warpath against non-OPEC producers.
In a desperate attempt to cling onto market share, it’s betting lower oil prices will put high-cost producers – such as those in the US shale-oil business – out of action.
That doesn’t look to be changing anytime soon…
Yesterday, Saudi Arabia announced it would be discounting the January selling price of the crude it sells to Asia and the US.
Saudi Aramco, the state-owned oil company, reduced the price per barrel for its Asian customers by between $1.50 and $1.90, compared to December. And it discounted oil headed for the US by between 10 cents and 90 cents a barrel.
This helped push down US crude oil by 0.8% to $66.28 a barrel. Brent crude – the international benchmark – fell 0.7% to $69.15 a barrel.
That’s roughly 40% lower than where Brent crude traded in June.
But there’s still plenty of room for further price falls. In 1985 and 1986 – when global GDP was in the 3-4% range, where it is now – price wars between OPEC producers led to a roughly 66% fall in the oil prices.
Here we differ from Bill: Although he agrees that new technologies will reduce the cost of energy, he believes prices will rise anyway, in waves, following troughs of disinvestment.
Our view is that more disruptive technologies – think more efficient extraction techniques but also demand-reducing smarter metering – will keep oil prices in a secular downtrend.
Only time will tell which of us is right…