BE AWARE! AS COMMODITITIES, SUCH AS OIL DROPPPING MAY NOT BE A GOOD THING IN OUR DEFLATIONARY ENVIRONMENT. READ THE FULL STORY: -------------------------------------------------------------------------------- ECONOMY & MARKETS | 12.08.2014 Is the Fall in Oil and Commodities a Good Thing? Not in a Deflationary Environment Dear Sarah, Three trends have come together and are igniting a deflationary environment. Central banks are fighting them with a fire hose of quantitative easing (inflation). The first trend and, it’s slow at this point, is deleveraging the greatest debt bubble in history. The second is aging populations in the developed world and the third is falling commodity prices. If governments and central banks are intent on fighting deflation, as they clearly are, they can’t be happy about commodity prices, especially oil, continuing to fall. I’ve been arguing for years now that falling commodity prices is one of the least recognized indicators of the next global crash and financial crisis. The falling prices trigger a vicious cycle of slowing exports for emerging countries. Look at China’s export bubble… falling commodity prices slow its emerging country markets, but China is the biggest importer of commodities to feed its manufacturing export machine (now the largest in the world). Then that in turn slows commodity prices further. And there’s the perfect picture of the vicious cycle… -------------------------------------------------------------------------------- The DOW is About to Plunge to 6,000! The man who predicted nearly every major economic trend over the past 30 years…including the 1991 recession, Japan’s lost decade, the 2001 tech crash, the bull market and housing boom of the last decade and, most recently, the credit and housing bubble… Now predicts the DOW is going to crash. -------------------------------------------------------------------------------- Emerging markets (EEM) are 29% below their late 2007/mid-2008 highs and commodity prices (CRB) are 47% below their mid-2008 highs. The first commodity crash hit sharply in 2008. The next one looks like it’s emerging progressively into 2015 to 2016. The last global financial crisis was triggered by the subprime debt crisis in the U.S. and the next one we face could well be triggered by continuing falls in commodity prices and in the emerging markets that correlate most with such prices. Oil’s Landscape Oil’s plunge has been the most dramatic, as it was back in the crash of 2008 — $147 to $32 in just over four months. I’ve never seen a market fall that much… that fast. It was caused by the high leverage of such increasingly dominant traders and hedge funds. And it was steep because they had to sell due to massive margin calls. Oil has traded between $114 and $75 and finally broke down more sharply than other commodities, hitting $64 on December 1. It’s traded between $63 and $68 since then. Oil is extremely oversold right now and has minor support from the early 2010 low around $64. After that there’s no obvious support on this chart. The next support is at $32, the late 2008 low… definitely not a pretty picture. Saudi Arabia thinks oil will settle down around $60. Maybe near term, but that’s not what this chart is suggesting just down the road. The most likely scenario would be a rally back to $75 to $80, then another crash sometime in 2015 down to as low as $32. I see oil ultimately bottoming around $10 to $20 in the years ahead. But that could only happen if global growth slows much more and especially in emerging countries. A new China momentum indicator suggests China will slow to 4% to 5% over the next year, lower than its 6% low in 2009. This can’t be good for the global economy and would strongly suggest another crash in stock prices as well. Our view is that falling oil and commodity prices are a sign of the slowdown and deflation crisis ahead — not a good sign this time around. In a deflationary environment, falling commodity and oil prices is not a good thing even though there are obvious benefits to consumers in the U.S., developed countries and China. Likewise, rising oil and commodity prices aren’t good in an inflationary environment (think about the one in the 1970s) even though such prices do benefit emerging countries and commodity exporters. And what does this do to the fracking industry in the U.S.? That outcome won’t be good at all, especially as some producers will go under at current prices and many more below $58 a barrel. Energy companies are responsible for 20% of the junk bond debt in the U.S. That’s the whole purpose of Saudi Arabia not cutting production with the increasing excess oil capacity. It wants to kill off its fracking and less-efficient oil-producing rivals. If oil does rally in the coming weeks or months and then turns around and starts to collapse again and breaks back below $63 — it’ll be downhill from there. Watch out for the next global stock crash if it happens. Harry P.S. Many of you met Ben Benoy at our 2014 Irrational Economic Summit. If you haven’t already, take a few minutes to read more about him here. Follow me on Twitter @harrydentjr -------------------------------------------------------------------------------- Ahead of the Curve with Adam O’Dell Market Focus Fixed on Commodities By Adam O’Dell, CMT, Chief Investment Strategist, Dent Research Investors are growing increasingly distracted with year-end loose ends and the holiday season — so last week was a bit lackluster. The U.S. economy still looks to be the world’s bright spot. Friday’s strong jobs report rekindled hope for better-than-stall-speed U.S. growth. Meanwhile, Japan’s economy is still contracting sharply, China is slowing and the euro zone looks set to plunge into recession if the European Central Bank doesn’t act soon. The crashing oil market continues to dominate headlines, and everyone is still trying to figure out whether the rout is short- or long-term, and what its impact will be on the world’s oil-dependent economies. Obviously, net exporters who derive a large share of their GDP from oil — like Russia — will suffer greatly. Meanwhile, net-import countries will enjoy the price break to varying degrees. And although the U.S. is a net importer, most calculations show only a minor increase in U.S. GDP attributable to decreased global energy prices — particularly now that U.S. oil production has grown so dramatically in the last decade. Now, let’s take a closer look at these trends as we go around the market in 10 seconds… Around the Market in 10 Seconds --- Stocks ▼ Bonds ▼ Commodities ▲ U.S. Dollar ▼ Volatility ▲ Health Care ▲ Consumer Staples ▲ Industrials ▲ Consumer Discretionary ▲ Utilities ▼ Financials ▼ Technology ▼ Materials ▼ Energy Global stock markets were mixed last week. Chinese stocks (FXI) rose a sharp 3.4%, while emerging-market shares (EEM) dropped 1.5%. U.S. stocks were mildly higher but, interestingly, led by a 0.9% gain in small-cap stocks (IWM). The outperformance of small-cap stocks is noteworthy, because they have materially lagged all year. It’s too early to make judgments, but I’m watching closely the small-to-large cap ratio (IWM: DIA) and will be on guard for a bullish turnaround. Bond markets fell across the board last week as the strong jobs report painted a robust outlook for U.S. economic growth, causing interest rates to climb higher. We’ve probably seen a near-term low in interest rates after the 10-year has now bounced higher off of 2.2% on two occasions. Commodity markets were mostly down. Energy markets suffered through continued negative pressure last week and have yet to find any meaningful support (read: buyers). Any contrarian who tried to buy oil’s perceived steep discount in recent weeks is only sitting on steep losses. Positive seasonality for oil typically doesn’t show up until January, so it’s still best to side-step any oil exposure as this shakeout continues. Looking Ahead… Spiraling oil prices will continue to draw the market’s focus this week. And while the slide can certainly be viewed as a warning sign of weak global demand, the strong jobs report last week suggests U.S. growth, at least, is robust enough to avoid recession for the next several quarters. If you’d like to get more in-depth information about what I’ve been recommending to my Cycle 9 Alert subscribers, click here. Best,
Posted on: Tue, 09 Dec 2014 04:36:50 +0000
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