Extremes In The Markets: Expect Consequences (Part II)

What Extremes?

Crude Oil has fallen nearly 60% in less than a year – back to lows last seen in 2008, after crashing from a high near $147 a few months earlier. The economic consequences in the oil sector will be extreme.

The US fracking boom has turned to a bust. See chart below courtesy of wolfstreet.com.

Silver is approaching the four year anniversary of a high near $50 in April 2011. It is currently (March 24, 2015) about 65% lower. Today’s prices would have been considered extremely unlikely four years ago.

Iraq War 3.0 is escalating. “Boots on the ground” has happened again in the Middle-East. Wars create massive debt and eventually commodity price inflation. They also create huge profits for certain industries that are heavy contributors to political campaigns. It is an old story…

The situation in Ukraine is difficult, perhaps intractable. It appears that one country wishes to provoke the other country into war, either ugly conventional war or nuclear. Peace and diplomatic negotiations are less likely with each new tank and soldier brought into the area. The US recently sent 3,000 troops to countries near the Russian border. Russia has 45,000 troops performing war drills.

The XAU index of gold and silver stocks has been crushed (an extreme low) compared to the S&P 500 Index. Consider the following 25 year chart.

There are more extremes that could be shown, but consider a few specifics.

The US strongly discouraged the AIIB (Asian Infrastructure Investment Bank) but when the UK, Germany and France ignored the strong request from the US and joined the AIIB, the US lost the gambit and position. From Zero Hedge, “But make no mistake, this is at best an example of Washington cutting its losses and at worst an outright surrender.” This is one more sign that other countries are considering dollar alternatives – an extreme change in our dollar-centric world.

The FOMC met on March 18, made their pronouncements, and the media spent hundreds of hours of air time on whether the word “patient” would be removed and what that indicated. The media obsession with the interest rate pronouncement from the FOMC seems like a Three-Card-Monte diversion to conceal the location of the target object. Perhaps the target that must be hidden is that the US has accumulated $18 Trillion in unpayable debt and still has a weakened economy. If QE1,2,& 3 plus ZIRP did not solve problems, will QE4 do any better?

Central banks are attempting to generate inflation. From Hemingway:

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin.”

If central banks cannot produce their desired inflation, another alternative is war. Perhaps war will be used as a diversion and scapegoat to reverse the deflationary forces that central bankers fear. Perhaps we will hear some version of, “The economy crashed because of the war with the Russians, which they started. The problems in the economy are in no way related to four decades of fiat currency printing, out of control government spending, and a Federal Reserve that has one solution for all problems – more spending and more debt.”

We have many economic and political extremes in our current world. Perhaps this time will be different, but I doubt it. Plan on:

• Debts will increase until a “reset” occurs.
• Politicians will “extend and pretend” and make MANY promises.
• The S&P has enjoyed a large rally in the last 6 years. It will correct.
• Bonds are in a massive bubble, partially created by the low and negative interest rates forced upon the system by central banks. All bubbles eventually burst.
• Gold and silver and their stocks have been beaten down for four years. They will rally to new highs.

******** 

Gary Christenson

The Deviant Investor