Oil has crashed and now trading at roughly half the level it was just 6 months ago. There are winners and losers of course but this is not the point, the point is …this is either the sign of a credit contraction, the cause of a credit contraction or both. Consumers are obviously winners and producers the losers, just as oil importing nations are the winners and exporters the losers. But, as I just mentioned, this is not the point at all.
It is my belief that this was “our” plan to try to bust or at least hamper Mr. Putin and Russia. This type of action worked during Ronald Reagan’s era and the Soviet Union was financially broken. I believe Washington simply opened up the old playbook, started rubbing their palms together in anticipation and then …”let ‘er rip”. This action obviously included the help of our “friends” the Saudis, a glut could not ever develop without their help. Please understand this very important data point, supply and demand were only out of balance by less than 2%, something much bigger is at work here. “What is at work here” as I see it were all the high(est) level meetings held over the last six months between the Saudi royalty and both Russia and China, what do you suppose was discussed?
Has Saudi Arabia “bowed” to U.S. wishes and held or even increased output…BUT with the blessing of China and the knowledge of Russia? Let me explain the thought process. Has China calculated what would happen to the West’s highly levered and “derivatised” system were oil to crash “too far?” Did they have any idea what or how big the derivative time bombs were that are now surely being set off? Yes, it means cheap oil for China who is a huge importer of oil but I only believe this is just icing on the cake. In my opinion, this “U.S. plan” to bankrupt Russia was “PLANNED” (by the East) to boomerang back on the U.S. Yes it has already destroyed our shale industry but more importantly, what is it doing behind the scenes to banks and brokers who are sitting on trillions of $ worth of energy derivatives? We already know Phibro, the 130 year old commodities firm is shutting their doors… but what about the banks and brokers?
I ask the question and again repeat “there are both winners and losers” …but please remember, if the losers lose “so badly” as to make them insolvent …the winners suddenly become losers! The financial system in the West is so intertwined and leveraged, no one can be allowed to lose “so big” that they are bankrupted. But this is exactly what has already in most likelihood happened. Someone is already dead, or better said “someone(s)” plural are already dead! We are talking about 100’s billions or more likely trillions of $ have already changed hands (on P + L statements).
Another set of time bombs are all of the CDS issued and purchased not just on energy companies but on sovereigns themselves. Let’s assume (which I do not), Russia does actually default on their $200 billion of external debt. This is actually quite small when compared with other nations but how many credit default swaps have been written on this? Typically, CDS is insanely written at a 10-1 ration versus the actual credit. My question is this, if Russia were to default on $200 billion and triggered $2 trillion worth of CDS, someone wins and someone loses. “Who” could lose $2 trillion in today’s world? What about others like Iran, Venezuela and on down the line not to even mention the various corporate entities could bankrupt?
The oil crash in my opinion is really about a global credit contraction. Global economies are slowing and yes demand for oil has decreased but this decrease does not account for a 50% drop in price …leverage does. Oil, just like anything else is “commoditized” with levered bets which increases the volatility when it occurs. The leverage works on the upside where the move looks orderly and like it will never end, until it does. Once the trend has ended, “margin calls” force sales and is exactly what we are seeing now.
Switching gears just a little, the world’s monies are all debt or credit based, a credit contraction will also destroy various (all) currencies that are levered into this trap. What will happen if (I believe when) Russia decides to ask for gold in exchange for their oil and gas? Think about this question as it is very real. Were Putin to decide on this strategy, is he dealing from a position of strength or weakness? Does Russia need the revenue as much as the world needs his oil? Before making up your mind, remember, Russia is actually a larger producer than Saudi Arabia.
If Russia were to ask for gold in return for oil, where would things go from there? Oil would whipsaw in price as would the ruble. Gold would then be “remonetized” overnight and its price more than likely explode. But there is one more step to a “demand” of gold for oil. This step would “expose some folks” so to speak. In other words, who really has the gold to pay for oil? Yes I know, at current prices, sovereign gold would run out pretty quickly, a markup of gold prices versus oil which would be a natural from market forces would change this. What I am getting at here is, were Mr. Putin to demand gold in payment for oil, we would pretty quickly find out who actually has gold and who doesn’t.
Before you shut your brain down and call it lunacy … “no one will ever ask for gold as payment for oil” …ask yourself why China and Russia have been accumulating it so fiercely? Russia can certainly say “hey, you crashed the price of oil, but now we want something real for our real product”. This would certainly work for China as they are filling their oil reserves and would like their gold stash to be valued at a level to back their currency for the next 100 years or more. The other side of the coin of course is what will be learned of Western gold reserves. Do we have it or not to pay? Is this why the “core four” of Germany, Holland, Belgium and Austria want their gold back within their borders? Can they see the need to use it for oil and gas purchases or to back a bloc currency?
Think for a moment, think about the “shorts” in the ruble and now the shorts in oil? Are the “shorts” of Western origin? Who would lose the most from a spiking oil, ruble and gold price? As I mentioned earlier, there are most probably some very dead participants who were caught on the wrong side of oil. What will happen if some Sunday night Mr. Putin said “we will be happy to ship oil, please ship us gold?” The oil, ruble and gold shorts will be destroyed along with the record amount of dollar longs followed by the dollar itself!
Let me add this to the mix. I have written many times just how easy it would be for the COMEX to be broken. It would only take $2 billion to physically take out the registered inventories of gold and silver.
Another $10 billion would probably be enough to include the LBMA and topple their fractional reserve scheme. If this were done, it would be viewed as a declaration of war on the West by the East. Instead, we have declared financial war on Russia, who would blame Russia if they retaliated by asking for real money for their real goods?
I will leave you with a couple of questions. Why did the budget deal just pass in Congress with hugs, kisses and the inclusion of $303 trillion worth of derivatives being “covered” by the FDIC (read; “taxpayer”)? Why did CME expand limits for gold and silver trading to $400 and $12 per day effective next Monday? Why is Russia testing their own clearing alternative to the West’s SWIFT system? Oh, and one more question, is “gold” a part of this clearing alternative?
Before you write to tell me “this can never happen”, please don’t waste your time. It CAN certainly happen! Will Mr. Putin decide on this? I have no idea but if I were in his position I would certainly go this route. Especially since the Western credit edifice has never been more vulnerable than it is now. A credit “wobble” from a self-inflicted oil price implosion would be ironic. I would also do this as a way to move away from the dollar and toward an asset I have been steadily accumulating, gold. I would do this to FORCE a “perestroika” (Russian for “restructuring”) on the West!