Think You Can Time the Markets? Think Again …

Submitted by William Bonner, Chairman – Bonner & Partners

Nobody Knows Anything

PARIS – What do we know now? We consult the gods… and the dead. On Tuesday, the Dow eked out a 52-point gain, to the relief of investors [ed. note: that was wiped out and then some on Wednesday].

But crude oil continued its historic slide. As of yesterday’s close, a barrel of U.S. crude oil changed hands for just over $31 a barrel. That is a 71% drop from the $107 price tag at the peak of the oil market about 18 months ago.


oil_storage_tanksCrude oil storage tanks… bursting at the seams.

Photo via


There is so much oil inventory that storage tanks are bursting at the seams. And oil shippers are collecting near-record daily rates, as their tankers are used for storage, as well as for transport.

If inventory holders become forced sellers, as some analysts predict, prices could hit $10 a barrel before this bear market is over. Then inventories will be drained, and today’s lack of investment in new output will send the price up again.

As Bonner & Partners researcher Nick Rokke notes, market prices do not revert to the mean – especially in the commodities sector. Instead, they go to the mean and keep on going. One extreme leads to another equal and opposite extreme…

In our view, the big drop in oil prices is one of the many unforeseen consequences of Fed policy. There are other factors at play, too. But by encouraging U.S. oil producers to borrow at ultra-low interest rates, the Fed exaggerated the usual boom-bust cycle of the commodity markets.#


1-BLS spot commodities indexBLS spot commodities price index: giant boom-bust cycles driven by monetary policy – click to enlarge.


Cheap credit made it possible to overinvest in production… which made it possible to overproduce… which caused prices to collapse. Others have a different explanation. They believe the low oil price illustrates the foolishness of the “Peak Oil” hypothesis. Continue reading

A New Fed Mandate? The Labour, The Demand and The Holy Profits

Submitted by Thad Beversdorf  –  The First Rebuttal Blog

Let me say it has been a couple months since I’ve felt compelled to post which may account for the length of this latest piece but I hope and believe most will find it worth the full read.  A coffee and 10 minutes (ok maybe 15…) are a perfect compliment to this piece.

Well it’s official markets have moved into a frenzy of absolute insanity with 6% swings in expected future cash flows every couple days.  It means the models have broken down.  But price insensitive ‘investors’ managed to prevent a reconciliation between economic and market performance last year despite revenues and earnings now also having broken down.  It’s impressive and depicts the ability of the Fed to impact MARKETS if not the economy.

But it also highlights the incredible lengths CEO’s have (perhaps understandably) gone to defend market cap.  Now that the Fed has boxed themselves out of the equation, neither able to raise again or cut rates without either action punishing the market, it is back to the underlying fundamentals. And that means it is time to understand how the Fed’s policies and the market’s delusional expectation of perpetual earnings growth have led CEO’s to misallocate hundreds of billions in capital, actually destroying the mechanism for economic growth itself, namely, demand.

I’ve talked ad nauseam about how the natural bond between profit and labour has broken down (now don’t roll your eyes I’m about to take you to places you’ve never been before).  And this is a direct result of incredibly destructive economic policies, both fiscal and monetary.  I’ve discussed the idea that there is a mathematical critical point of narrowing income distribution below which an economy simply cannot grow no matter how much money is injected.

I’ve also discussed the idea that profits can only grow in the face of declining demand by cutting costs and contracting operations.  That is, cut labour and capex to reallocate those funds into income, share buybacks and dividends.  This is exactly what CEO’s have been doing for the past 6 years while they wait for consumer demand to improve.  However, I have also suggested there is a limit to the financially engineered earnings growth.  When the cash dries up so too does the engineering.  The hope in such a strategy is that demand returns before the cash runs out.

In early August I offered a chart and predicted an imminent major market selloff.  The basis was that earnings had finally rolled over despite the financial engineering.  The reason is that cashflow can only be supported by costless borrowing and operational contraction until the lending slows and all the fat is trimmed, at which point the well runs dry and the financial engineering becomes impossible. Continue reading

What Happened To The Dollars?

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

You can kind of get a feel for where we are by days like today. In the morning, a foreign central bank in almost grand standing (for now) is obliged to crash a money market of its own making and the world responds, initially, by cheerful enthusiasm. As O/N HIBOR was making its way up to 66%, oil prices (February 2016 contract) were back up toward $33 again, pulling with it the global narrative machine that passes for stock analysis. The relief was short-lived, and WTI actually traded under $30 for the first time in a very, very long time (closing back somewhere in the middle).

I doubt very much that reversal had anything to do with conscious appreciation for convertibility, but deep within the mechanics of money and global liquidity it was certainly there. When I wrote yesterday about liquidity preferences under something like the eurodollar system, it was this that I had in mind; there is no defined mechanism for convertibility in a wholesale system that has banished hard money properties. As such, banking and monetary agents are forced to incorporate a different approach to liability management and prudence (modeled with and on volatility at its core).

It’s a very difficult concept to grasp largely because mainstream economics treats money as if it were still present; even if only as the Federal Reserve’s ability to create liabilities on its own balance sheet. This is the ancient world of the money multiplier.

There was something of that in the eurodollar system, but only in its earliest days where connections between onshore and offshore “dollars” were cumbersome and almost visceral. When Milton Friedman answered eurodollar confusion with some stark accounting in 1971, it was to define the basis of the money multiplication system then at its core. But even at that point, there were already signs that the eurodollar was something even more intangible and, frankly, incredible. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Asia Stocks Extend Losses, Japan’s Nikkei Falls 3.67% (CNBC)
Oil and US Stocks Tumble Over Fears For Global Economy (Guardian)
China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)
Q4 Will Be Worst US Earnings Season Since Third Quarter Of 2009 (ZH)
The Real Price of Oil Is Far Lower Than You Realize (BBG)
Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners (BBG)
Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes (ZH)
Currency Swings Sap US Corporate Profits by Most in Four Years (BBG)
African Exports To China Fell By 40% In 2015 (BBC)
Money Leaving Emerging Markets Faster Than Ever Amid China Slump (BBG)
China Bond Yield Sinks To Record Low As Central Bank Injects $24 Billion (BBG)
China’s Better-Than-Expected Trade Numbers Raise Questions (WSJ)
Surging China-Hong Kong Trade Raises Doubts Over Recovery (BBG)
The Quiet Side of China’s Market Intervention (WSJ)
As China Dumps Treasuries, Other Buyers Expected To Step In (BBG)
Reporting Rule Adds $3 Trillion Of Leases To Balance Sheets Globally (FT)
EU Scientists In Bitter Row Over Safety Of Monsanto’s Round-Up (Guardian)
Thousands Of Farmer Suicides Prompt India Crop Insurance Scheme (Guardian)
Greece Said To Propose Return Trips For Illegal Migrants (AP)
Tighter Border Checks Leave Migrants Trapped In Greece (AP)
Refugee Influx To Greece Continues Unabated Through Winter (Reuters)
Europe Sees No Let Up in Refugee Crisis as January Arrivals Soar (BBG)