August 9, 2016

This weekend, a reader emphatically tried to convince me oil prices were bottoming, as the “best cure for low prices is low prices.”  His argument covered every possible angle, from fundamental to “technical”; assuming, generally speaking, that the historic supply glut – as exemplified by record US gasoline stocks, much higher than a year ago – will soon be worked off, yielding materially higher prices.

On paper, that’s how commodity fundamentals typically work.  However, the unprecedented “deformation” of commodity markets by decades of money printing, financial engineering, predatory lending, and unfounded Keynesian belief have made today’s commodity markets – and for all intents and purposes, all economic relationships – unlike any in history.

This concept, based on David Stockman’s brilliant work, is what I wrote of in January 2015’s “direst prediction of all,” one of the most important articles I have ever penned.  In it, I postulated that the deflationary tsunami that has taken most commodity prices to multi-year – and in many cases – multi-decade lows will continue for years to come.  And heck, I didn’t even mention the horrifying demographics the majority of the world faces, which will dramatically exacerbate such trends.

FYI, here’s how the CRB Index has done since that article was written, down 20%.  During which, for “deflationists” that believe Precious Metals are mere commodities, gold and silver have risen by 15% and 26%, respectively.  And by the way, since the summer of 2008 – just before the global monetary system broke permanently – the CRB Index is down 61%, whilst gold and silver are up 35% and 5%, respectively.

That said, there’s no need to hide behind theory, even one as ominous and historically unprecedented, as the “great deformation” discussed above.  As frankly, the situation is far uglier now than in January 2015.  To wit, energy inventories are higher, demand is weakening, the Chinese have apparently fully filled their strategic oil reserve, and both OPEC and Russian oil production are at all-time highs.  Global trade indices, such as the Baltic Trade Index, continue to plumb new all-time lows; in the BTI’s case, down 95% from the pre-crisis highs.  To that end, this morning’s brutal, “worse than expected” Chinese trade data tells you all you need to know about the direction of the global economy – as exports were down 4% month-on-month and 5% year-on-year, whilst imports were down 13% month-on-month and 8% year-on-year.  Moreover, Chinese oil imports fell to a six-month low, with nowhere to go but down.  To that end, the demand side of the equation alone will destroy any hope of a sustainable commodity price recovery, in the same manner that the massive, unprecedented amount of global debt guarantees no central bank will meaningfully raise interest rates, if at all, in the foreseeable future.  Or, truth be told, until this massive, unpayable global debt edifice defaults, either via non-payment or hyperinflation.

Regarding oil specifically, I have long deemed it the “world’s most important commodity” due to the fact that more revenues are generated from it – with more debt tied to it – than any other market.  Which is why, given the indisputable fact that OPEC no longer controls prices, an impromptu “oil PPT” was created last year – unquestionably, led by the U.S. government – to boost paper prices higher, just as the Cartel suppresses paper gold and silver.  Unfortunately for them – both of them – the forces of physical supply and demand are swamping them; which is why all the money printing, market manipulation, and propaganda they can imagine has failed.  Which is why, I might add, this morning’s crude “spike,” based on rumors of, I kid you not, a September OPEC production cut, will fade like a fart in the wind; just like last year’s “production freeze” propaganda.  Which – like the “four rate hikes” that were supposedly guaranteed this year by the Fed – not only didn’t happen, but weren’t even discussed.  And by the way, if you want to know why production cut rumors “conveniently” occurred now – aside from the upcoming election, in which all manipulative stops are being pulled to ensure a Hillary victory – look no further than this article, warning of the catastrophic debt defaults sub-$40 oil will bring.

And putting the final nail in the coffin of the crude oil – and generally speaking, commodity price – outlook for the foreseeable future, is that little old thing called the biggest currency crisis in global history.  Remember, the weaker “commodity currencies” get – and right now, nearly all are at, near, or well below previous all-time lows – the more commodity demand declines, and the more difficult it is for the massive amounts of debt issued in such currencies to be paid off.  Or should I say, the closer they are to their imminent defaults, as there’s not a mathematical chance – like the U.S. national debt – they could ever be repaid.

In a nutshell, global debt, currency, and commodity markets are in an inescapable situation, no matter how hard the powers that be try to “save” them via unnatural, ineffective Keynesian means and outright market manipulation.  I mean, the PPT-supported US stock market is currently trading at an all-time high, featuring record P/E ratios for companies in the black, and record EV/EBITDA ratios for those in the red, despite the biggest collapse in economic activity – and surge in debt – in global history.  This, as even “non-GAAP” goosed corporate earnings are down for a second straight year.  Not to mention, as stocks in nearly all other nations are falling, despite massive intervention, both overt and covert, by suicidal Central banks.

To that end, how much longer can Precious Metal prices be kept down – via blatant raids like Friday’s “BS NFP Attack” and last night’s 152nd “Sunday Night Sentiment” raid of the past 158 weekends?  Not long, methinks, as physical markets are historically tight, getting more so with each passing week.  Heck, paper markets sit at their most precarious state ever, given that the Cartel – er, “commercial” – short position is literally off-the-charts, exposing them to the inevitable “signal failure” we all know is coming; likely, sooner rather than later.

Well, that’s enough for now, on this seemingly quiet August Monday.  However, given all I have written above; and more importantly, all that has transpired in recent weeks/months/years; NEVER has the urgency to avoid complacency been more powerful.

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.

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