Very interesting times we now live in, the financial system is running out of options very quickly and “blowing up the world” seems to be the only final option. I know, this sounds grandiose and dire but let me explain.
This past week we finally saw some very big volatility in global stock markets. I say “finally” because it has been almost 3 years of a steady grind upward where all drops were “aborted” and volatility kept to a minimum. This changed … “something” has changed. We are now red for the year in the closely followed Dow Jones and actually approaching “bear market” territory on the Russell 2000. European bourses have also been very weak and took out some important support levels this past week.
So what has changed? First, the dollar has had a spike upwards in its biggest rally in 4 years. I believe this to be a result of the Fed “only” printing an extra $10 billion (soon to be zero?) per month versus the previous $85 billion per month. This “lack of extra liquidity” has affected the dollar market (I believe short term) and also upset the leverage in the stock market. On a side note, one of Apple’s suppliers went into a “secret bankruptcy” this past week and the reason for this bankruptcy has been “sealed” by the court. How can this be? Apple is doing great so why would a supplier have a problem? Could it be that this supplier was on the wrong end of some sort of hedge or derivative? I think you can bank on this as the explanation, little else fits AND could be swept under the rug so neatly!
Volatility and stress is back and now being felt and seen plainly in Europe. The euro as an inverse to the dollar has been quite weak. In what would have been “heresy” 10 or more years ago, the calls for a very real and very large “QE” are being heard throughout Europe. RBS and Bank of America were quoted in The Telegraph titled, Dam breaks in Europe as deflation fears wash over ECB rhetoric – Telegraph that deflation is taking over Europe. This very well may be but the flip side of the coin are all the sovereign nations where (understated) debt is at or above the banana republic threshold of 100% debt to GDP ratio. You can now see it as clear as day, “inflate or die” and in either case there unfortunately will be no middle ground.
Another area to look at is oil, the price has cracked well below $90 per barrel for both WTI and Brent crude. Why would this be with all of the unrest and potential production damage caused by warring factions? Zero Hedge put out a great piece on Friday with an explanation, Why Oil Is Plunging: The Other Part Of The “Secret Deal” Between The US And Saudi Arabia. As I had written about several weeks ago, we are witnessing the U.S. classic playbook in the run up to war.
If you recall, I wrote that standard operating procedure prior to war is to make your opponent weaker financially by hook or by crook. The U.S. has strengthened the dollar and pushed the ruble into new low territory. The price of oil has been pushed down which affects two foes, both the Iranians and Russians. Iran has a breakeven cost for budget purposes of $140 per barrel and Russia budgeted $100. They are being squeezed in the hopes that Syria can be finally toppled without Iranian or Russian interference, I believe this to be a faulty plan.
This of course is all about a gas pipeline that Syria, Russia and Iran do not want as Arab oil and gas will compete with Russia’s production in Europe. I believe this “plan” to be faulty because the Chinese will bankroll the Russians no matter how low oil goes. I also believe this may be THE very last deal where the Saudis work hand in hand with the U.S. They want Assad gone and at long last have the U.S. doing their dirty work in Syria, what will happen if or when Assad does fall? Do the Saudis really want “cheap oil”? No, no more than Russia or any other producer. Will the Saudis stand with the petrodollar when derivatives are blowing up and taking the financial system with them? Again, no. It is clear the financial power of the U.S. is waning, will Saudi Arabia hang on or will they trade their allegiance toward the rising Chinese? I still personally believe they will not only switch sides but it will be this particular announcement that historians will look back upon as THE watershed event of the decline of American hegemony.
Another big newsworthy area last week was the spread of Ebola. “It couldn’t reach our shores” we were told. It has. Our borders are open, flights from West Africa continue to land here and the virus apparently created and patented by the U.S. is coming home to roost. Fast forward 2 or 3 months, how likely will you be to get on a plane? Or go to a restaurant or shopping mall, grocery store or anywhere else for that matter if it means becoming infected? Connecticut has already declared a state of emergency where your civil rights are no longer and the state can quarantine you if they wish? Ask yourself this, why 5 years ago were 100’s of thousand “hermetically sealed” casket liners stacked up outside of Atlanta? What could they possibly be used for …other than disposing of bodies with “the plague”?
The situation we are now in financially and economically was known about years ago, it just wasn’t known how far down the road the can could be kicked. Now, the ruse all around the world is beginning to collapse and as I have said for the last several months …something or someone will need to be “blamed.” A war, a plague, a computer hack attack, a “un” natural disaster or whatever will be pointed at as the cause for the financial system’s collapse when in fact the table is now in the process being kicked over purposely. The hope in my opinion is that when everything collapses, the public will be more interested in the future and getting back up and running rather than protesting what got us here. Oddly, if the coming collapse can be blamed on an Ebola plague, protestation and violence will be much less than otherwise. Who will risk contracting Ebola by joining protests? What is for sure is that either left alone or “pushed” over the edge, the current ship in its current form is going to mathematically sink. “Blame” will come, the only question being “on what” and the extent of the following reaction. The rest of the world is becoming fully aware of this which is why the demand for gold has increased so dramatically, I will talk about this tomorrow.