I could have gone so many different directions this morning as soooo many scary things are occurring simultaneously. However, the key theme is what hit me like a “ton of bricks” as I awoke at 3:00 AM – i.e., the “Great Deformation” of economic activity and financial markets caused by fiat currency hyper-inflation. The catalyst for this revelation was this article by David Stockman, which I read in preparation of discussing the utter collapse of energy prices we warned of two months ago – with oil prices still above $80/bbl. – titled “crashing oil prices portend unspeakable horrors.” Not to mention, last week’s “shale oil 2015 = subprime mortgages 2008” and Audio blog, “crashing oil and currencies, America’s death knell”; and the commentary I wrote 20 months ago of the shale oil fraud – based on ten years of experience as an energy analyst – titled “unending energy independence hype.”
After reading his article, it became crystal clear that fiat currency regimes initially create highly inflationary environments, as the “unused credit card” of unfettered money printing is “charged up” by individual, corporations, municipalities and sovereign nations alike; until, inevitably, the brick wall of “diminishing returns” on such debt is reached. Shortly thereafter, “deflation” sets in; as the massive mal-investment caused by such borrowing – aided by Wall Street “leverage,” of course – causes economic stagnation, default and social unrest. At this point, the true Ponzi scheme nature of fiat currency takes center stage, when Central banks attempt to “postpone” said defaults with “QE to Infinity” schemes that ultimately destroy any remaining purchasing power.
Currently, the entire world is amidst the second stage – of “deflation” – as four decades of mal-investment from the four corners of the globe implode. No matter where one looks, this process is accelerating; and care of the liquidity the world’s “reserve currency” still holds, the dollar is seen as “strengthening” – when in actuality, the entire global fiat currency regime is collapsing. A process, we might add, which is dramatically accelerated by the “final currency war” – as governments take the politically expedient, but economically suicidal tack of devaluing their currencies in the name of “job creation” that never materializes. To that end, look no further than last week’s Swiss “no” vote – which in essence, doomed Switzerland to the same horrific fate as its European brethren. Not to mention, today’s horrific 6% plunge in the Chinese stock market, as the centrally planned Yuan had its biggest one-day decline since December 2008; which, undoubtedly, is the PBOC’s response to Japan’s maniacal implementation of “Abenomics II” last month.
In yesterday’s “lemmings for the ages,” we wrote of how such mal-investment – and the “Central bank put” implicitly underlying it – catalyzes historically overvalued financial markets. Abetted, of course, by the suppression of precious metal prices – which care of Larry Summers’ “Gibson’s Paradox” theory disables the inflation “barometer” money printing naturally increases. Stockman’s article, mirroring my aforementioned reference to the subprime mortgage crisis of 2008, brilliantly describes how the same “deformation” that created the 2000s real estate bubble – and frankly, the 1990s equity bubble before it – caused a shale oil bubble so large, it’s bursting could have dramatically direr ramifications. Not to mention, as the world’s debt structure is so much onerous, the economy so much weaker, geo-political tension so much more acute, government approval ratings so much lower, and the ability of Central banks to “bail out” failures essentially non-existent as their balance sheets have already blown up to unsustainable levels.
To that end, nothing makes me happier than being able to utilize the experience of my prior life as a Wall Street oilfield service analyst. I worked just as hard as today – actually, harder, as I was young, single and ultra-ambitious; and until the ramifications of the “tech wreck” set in, I was actually optimistic about the world’s future. During those ten years, ending in 2005 when I moved on to the mining industry, the most widely read work my team produced was the “E&P Spending Survey” we published bi-annually to gauge global oil and gas spending trends. By far, the most important was the year-end report, like the one depicted below. In it, we personally surveyed hundreds of companies from around the world to tabulate cumulative E&P capital expending expectations for the following year. Back in 2000, the outlook was extremely bullish; and by the way, note the “long-term oil price expectation” of $23/bbl.
When I read yesterday that Conoco Phillips, one of the world’s largest oil companies, plans to slash its 2015 capital expenditure plans by 20% or $3 billion, my first instinct was to refer to this report. Conoco Phillips specifically cites “less developed projects” – which in oilfield jargon, means ones whose marginal costs of production are above current prices. Which, of course, describes nearly all of the U.S. shale oil industry – particularly when “sunk costs” like leases and infrastructure are included. And oh yeah, interest payments on the roughly $500 billion of junk bonds and leveraged loans a decade of “ZIRP,” “QE,” and other essentially free money schemes catalyzed. I saw, too, that BP is also initiating mass layoffs, as the daisy chain of energy destruction commences. And scariest of all, as discussed in the aforementioned “crashing oil prices…” article, is that all of America’s job creation since 2007 has been in the shale oil industry – whilst all other sectors have experienced negative job creation.
And thus, when considering whether the Fed will raise rates in 2015 – as Treasury yields plunge toward historic lows, and the national debt explodes – think of how the all-out collapse of America’s only productive business might “influence” their thinking. Not to mention, as the entire global economy collapses – starting with commodity-based nations, but ultimately encompassing every aspect of economic activity. Today, for example, the Baltic Dry Index has fallen to its lowest December level since 2008; which in and of itself, proves what we wrote in “2008 is back, with one temporary exception.” And thus, we ask, can TPTB really maintain the aforementioned “exception” – of goosed stock markets – much longer? Or, for that matter, will they be forced into doing so via “Weimar-izing” it with hyper-inflation, sooner rather than later?
Yesterday, in our view, was a very important day. Within a matter of hours, oil prices dramatically collapsed to as low as $63/bbl. Moreover, the entire market impact of Friday’s historic NFP lie was completely reversed – with stocks declining, Treasury yields plunging, and precious metals surging. In fact, for all the beating it’s taken from the MSM and Cartel, gold is now up for the year – whilst, conversely, the “market darlings” of the Russell 2000 are down. As the old saw goes, when something won’t go down, it can only go up. And never has this been truer, in our view – particularly given that gold and silver are trading well below their respective costs of production, amidst the most violently bullish fundamental environment of our lifetimes.
This morning, these trends have expanded further. Commodity currencies are collapsing, global stocks and Treasury yields are plunging, and “chinks in the armor” exposing themselves for the world to see – such as GREECE, which we continue to view as a “black swan” event waiting to happen. This morning alone, we kid you not, the Greek stock market is down 11%; and worse yet, its benchmark 10-year government bond yield has surged from 7.3% to 8.0%. Next Wednesday, just three days after a potentially earth-shattering Japanese “snap election,” the same will occur in Greece. And lo and behold, the pesky “Syriza” party – intent on defaulting on Greece’s $400+ billion of debt – is leading in the polls. Gee, I wonder what will happen to the daisy chain of European banks’ PIIGS debt holdings if that occurs; much less, the even larger derivatives colossus underlying it – which we assure you, has only grown larger since nearly destroying the world in 2008 and again in 2011. Yes, DEFAULT will be one of the key financial themes of 2015 – in shale oil, sovereign nations, and otherwise; which is why, frankly, one must own at least some precious metals in their portfolio.
Not to mention, an all-out global revolt against Central banking, which is probably why Germany, Holland – and shortly, Belgium and France – are demanding repatriation of their gold. Moreover, if not for last month’s historic propaganda and market manipulation efforts, Switzerland would be joining China, Russia and the entire Eastern Hemisphere in aggressively purchasing it in the open market. To that end, yesterday’s quote from a senior executive of a major trading firm may well be 2014’s most prescient that “(2015) is the year the Fed is going to lose credibility – when it gets to March or June, and they announce why they’re not raising rates.”
To conclude, on the topic of the re-emergence of precious metals, it was quite remarkable to see one of the world’s “classiest” MSM cheerleaders – the New York Times – publish an article titled “the Golden Age”; as despite employing the king of Keynesianism himself, Paul Krugman, its editors clearly realize which way the winds are blowing.
And oh yeah, it’s official. The U.S. Mint’s 2014 Silver Eagle sales just surpassed 2013’s record level – having sold more ounces in the first eight days of December, than the entirety of December 2013! Sales of 2014 Eagles will end on Friday, and we can’t wait to see how large demand will be for the new 2015 coins. Give us a call at 800-822-8080, and we’ll be happy to give you a quote!