I’m not going to bore you with the entire, sordid litany of today’s “horrible headlines” – other than to focus on the epic, historic collapse of crude oil prices. Which, 15 months ago, when I penned “crashing oil prices portend unspeakable horrors, have plunged from $81/bbl to today’s $30/bbl – potentially, enroute to the $10-$25/bbl range they traded at over the entirety of my career as a Wall Street oilfield services, equipment, and drilling analyst, from 1996-2005.
During that time, what OPEC proclaimed was gospel. Consequently, OPEC meetings had the same market-moving potential as NFP employment reports today. Or, for that matter, Federal Reserve, ECB, and Bank of Japan policy statements. Back then, OPEC nations could be profitable at $20/bbl oil – and while Saudi Arabia had, by far, the most spare capacity, several other nations did, too. Moreover, “emerging market” currencies were much stronger, so the value of $20/bbl was far greater. And oh yeah, the world was in an economic uptrend – excepting the “isolated” events of an historic technology stock collapse, and the aftermath of 9/11. Moreover, even when I finally departed the “oil patch” in 2005, the concept of advanced shale recovery had barely been invented – much less, significantly utilized.
Fast forward to today, where not only has shale recovery exploded in usage – not just here, but overseas; but the world is amidst the worst economic Depression since, well, the Depression. Only this time around, the level of Central-bank generated debt and inflation – care of 45 years of unfettered money printing and financial engineering – yields ZERO chance of “recovery,” and a 100% probability of widespread, global defaults. Not to mention, unprecedented oilfield “spare capacity” – care of the unrelenting “frack-log” here in the States, and Iran’s post-sanctions goal of adding 1.0 – 1.5 million bpd of production to a market already oversupplied by perhaps 1.0 million bpd. And oh yeah, with the currencies of all the world’s oil producers at or near all-time lows; and finances so horrendous, they must generate as much default-averting cash as possible, there’s not a chance in hell that any nation – much less, massively overleveraged corporations – will halt production at any cost. Evidenced perfectly, I might add, by yesterday’s dismal earnings report by the world’s largest private producer, Exxon Mobil, in announcing a significant production increase whilst reducing its stock repurchase program indefinitely – as Moody’s put it on credit watch, to perhaps reduce it of its triple-A credit rating.
Throw in rising global geopolitical tensions and currency wars, and it becomes crystal clear that not only is OPEC, for all intents and purposes, DEAD – but the world may well be hit by an avalanche of supply at a time when, for essentially the first time ever, global demand may significantly decline. And I’m not talking about the temporary blips lower amidst the 1970s oil embargo, the post-9/11 “deer in headlights” economic slowdown, or even the 2008-09 financial crisis. No, I’m talking about what may well be a dramatic, decidedly not “short-term” decline; which can be seen as clear as day by the utterly explosive growth of not only U.S. crude oil supplies – to levels last seen in 1930 – but gasoline as well. Which is probably why we’re down to $1.50/gallon here in Denver, versus $3.50/gallon last summer.
In other words, the “Great Deformation” of monetary policy David Stockman warned of – which I highlighted in my MUST READ article of 13 months ago, “direst prediction of all” – is coursing through the economy like leukemia through the bloodstream; certain to destroy everything in its path via the most devastating deflationary wave in history. Yielding, of course, the most hyper-inflationary monetary response; and with it, the aforementioned “unspeakable horrors” – politically, economically, and socially. Such as, amidst yesterday’s financial market carnage, the utter implosion of countless currencies to new lows, across the four corners of the globe. Not to mention, Moody’s highest “financial stress” reading in six years; and oil prices, contrary to the hopes and dreams engendered by last week’s lies “rumors” of potential Saudi/Russian production cuts, oil prices again plunged below $30/bbl.
Thus, the perfect segue to today’s principal topic – of last week’s other “positive news.” Or more aptly put, the news that enabled a one-day short-covering rally in stocks and crude oil, before crashing to the Earth a mere 24 hours later. Which is, the Bank of Japan’s comically desperate decision to lower rates from 0.0% to -0.1%, one week after claiming it was not considering such a move. In other words, putting yet another nail in the coffin of Central bank credibility – particularly as nearly all the comically manipulated equity and commodity gains have already been reversed.
That said, the nearly immediate failure of Japan’s negative interest rate policy to instill confidence –to the contrary, it promulgated fear – was compounded exponentially by yesterday’s announcement that Japan’s Treasury is cancelling next month’s 10-year bond auction because rates have essentially gone negative, making it unlikely they can be sold. In other words, the nation with by far the world’s highest debt/GDP ratio cannot service its debts – because its Central bank didn’t realize no one will buy bonds guaranteed to lose money, in a currency it is purposely destroying. Sure, they’ll just “print more money” – via “QE24”; “Abenomics III”; or whatever new currency-destroying scheme they can conjure up. However, just last week, BOJ officials espoused that further QE efforts would be difficult to implement, as very little JGB (Japanese government bond) supply is left to monetize, without eliminating the entire repo market collateral base.
But have no fear! Despite the fact that it said it won’t take rates negative, it did so one week later – “coincidentally,” as the Nikkei average was rapidly plunging. Which, I might add, it did last night as well, erasing nearly all of the post-NIRP gains. To that end, despite claiming an inability to effect additional QE, not only did Kuroda “come to the rescue” last night – again, as the Nikkei was plunging – but he actually plagiarized Mario Draghi, verbatim, in not only claiming further rates cuts were possible, but there would be “no limit” to the BOJ’s potential monetary easing measures. And, for good measure, the BOJ would do “whatever it can” to reach its (mythical, arbitrary) 2% inflation target. OK, so “whatever it can” is not “whatever it takes” – but, close enough.
Better yet, this monetary Frankenstein added a few hyperinflationary catch phrases of his own, in stating the BOJ will “keep looking for innovative monetary measures,” and that it will “devise new tools if current (hyperinflationary) measures are insufficient.” I mean, these are the most powerful people in the world – destroying billions of lives with economic philosophies on a destructive par with Hitler’s social philosophies!
All that said, the most ominous aspect of last night’s Hari-Kari madness is that, of all entities to call it for what it is, it was BANK OF AMERICA – i.e, the entity that has received more printing press-funded bailouts than any in history – that did so most prominently, in warning of the potentially disastrous ramifications of what appears to be a Bank of Japan “quantitative failure.” Which, of course, is exactly what has occurred at all “third world” and “emerging market” Central banks already. And inevitably, will occur at so-called “first world” banks like the BOE, SNB, BOJ, ECB, and, last but not least, the Federal Reserve. Which is why, I might add, the covert gold Cartel’s days are likely as numbered as the overt OPEC’s.
And LOL, as I’m editing, just before the Wednesday stock market open, the headline “stock futures surge as Bill Dudley hints at policy error” emerged – when the New York Fed President, and second most powerful person on the FOMC, became the first to admit the Fed may reverse course on its ill-begotten, ill-fated “rate hike” – in claiming “he and his fellow Fed policymakers will have to discern at their March meeting whether or not the plunge in stock prices and other adverse market developments cloud prospects for U.S. economic growth, employment and inflation” and “a weakening of the global economy, accompanied by further appreciation in an already strong dollar, could also have significant consequences for the U.S. economy.” Which is probably why money markets are now predicting ZERO rate hikes in 2016; and why I am predicting zero rate hikes EVER. That is, until hyperinflation inevitably “comes to town.”