What Happens Next? Who Knows?


The past year or so has been kind to dollar bears and commodities’ traders. The trade has been to short dollars and use the proceeds to buy gold/PMs, copper, euros, equities in emerging/developing countries.

The Fed has cooperated with zero- cost money (ZIRP) and your Business Friendly Treasury has stood by with the ‘Moral Hazard Promise’ to bail out any large bank or ponzi- practitioner who might falter.

Sort of like a ‘money back guarantee’, your money, their back!

It looks like the current version of the ‘dollar- short’ trade is wrapping up. For a lot of reasons it appears that liquidity is going to be in short supply.

As usual, nothing is cut and dried.

Here is a chart of the CME front-month euro from Estimable TFC Charts (click chart for larger image):

 

 

Despite all the sturm and drang, the euro never made new highs, either in the intermediate- or shorter term. Traders cannot tell whether a Greek default and quick exit from the currency union means a stronger euro/deutschmark in drag or a weaker one … or no euro at all! What happens next? Who knows?

The stunning incompetence of the European political class makes the US version look like the Return of the Founding Fathers. There are no practical reasons why the EU management cannot organize a continent- wide fiscal policy as it is in the interest of all to do so.

Why can’t they? Who knows?

If Greece defaults, look for Portugal to do the same. Peeps closely follow the Iceland devaluation story along with the ‘crooked bankers’ narrative that sensible economists are promoting. The establishment underestimates its vulnerability. The European publics are itching to give bankers a kicking. Defaults will hit the big EU banks like a sledgehammer. All are overloaded with Greek and Portuguese debt. Included in this group is the ECB, which will have to be recapitalized. The Germans are going to be furious having opposed ECB monetization then being required to pay for it: shan’t complain! All the Eurozone deflation has been bought and paid for by Germany’s greedy/stupid auto manufacturers and Berlin’s ‘self- centric’ mercantile policies.

Ironically, Ireland will stick with the euro to the bitter end. To paraphrase Ho Chi Minh, Ireland would, “rather smell French shit for five more years than eat British shit for the rest of (her) life”… Outcome? The euro might collapse around Ireland. What happens next? Who knows?

The dollar/euro chart indicates a dollar ready to rally for reasons outside of a imbecile Eurozone management. The dollar looks to be a slightly better solvency bet than the euro. Any sort of deal on Capital Hill about the US deficit/debt ceiling will put a high gloss on (fake) US creditworthiness and management competence.

Appearance — rather than reality — matters. The US is an energy bankrupt, but it can certainly fool some of the people some of the time. Here’s the Brent crude front month contract (click chart for larger image):

 

 

You look at this chart of Brent front- month continuous contracts and you can see the price hasn’t broken down completely. Tomorrow? Who knows?

You have to wonder whether crude is a commodity bubble supported by finance credit/margin and ‘enthusiasm’? Right now it is hard to say because people like oil products and will buy them if they have cash. Crude is still trending sideways after breaking from a high. If the price was below $90 or over $130 a barrel it would be easier to make a call. The market looks to chop along sideways for awhile before a new trend emerges. Neither a steep decline or a bolt upward in demand are out of the question. Will the cost of fuel reflect the end of QE? Who knows?

Here is yet another important item from Estimable Gregor Macdonald’s website (click chart for larger image):

 

2010 Oil Story: Drawing Down the Inventories

Hat tip to the Economist Magazine for catching a key, energy data point from week’s BP Statistical Review: in 2010, the world consumed about 5 mbpd (million barrels per day) more oil than it produced. Anticipating the discrepancy between the two figures, the BP Statistical Review authors write on page 9 of their PDF: Differences between these world consumption figures and world production statistics are accounted for by stock changes, consumption of non-petroleum additives and substitute fuels, and unavoidable disparities in the definition, measurement or conversion of oil supply and demand data.

 

We humanoids are certainly scraping the bottom of the (oil) barrel. 2011 looks much like 2008. All that’s missing is the massive price spike. Where is it? Did we just experience a not-quite-massive price spike? Possibly, but who really knows?

What is taking place right now is the convergence of several powerful conflicting trends.

  • The demand for petroleum has caught up to the ability of producers to supply the market (Peak oil), this is a trend that pushes oil prices higher.
  • The world’s energy productivity is declining and people are going broke as a consequence. Using fuel earns less of a return. Partly this is a function of those pesky high prices along with declining ‘Net Energy’ or EROEI. It costs more to bring fuel out of the ground: costs push marginal customers out of the market.

  • The establishment’s pointless ‘monetary policy’ distorts markets. Price discovery is short circuited: markets? What markets?

  • Meanwhile, the world is stuffed with credit that cannot be repaid. Any small problem can trigger an unstoppable deleveraging event and liquidity freeze. Debt is the 800 trillion pound gorilla in all of the rooms.

The nascent secular bear peeping around various corners are markets reasserting themselves. Buying crude contracts has been the other side of the ‘dollar carry’ beat- down. Yes, Virginia, there are speculators. Meanwhile, rising prices in asset markets make oil a tough sell for the marginal users on Main Street. Hardest hit are airlines, shippers, plastics manufacturers, molders of consumer discretionary items, owners of giant pickup trucks, etc. Price resistance ripples upward through the crude oil food chain: enough fuel buyers head to the sidelines to kick out the price supports. Markets do this all by themselves which is why we like them so much.

Markets are supposed to keep us honest.

It’s the battle of the trends! Crude is is not exactly plentiful, neither is money. The trend (manic) increase in consumption in China and elsewhere puts pressure on supply. Both China and India have plenty of money but are careful with it.

China’s management has to know — even as Americans don’t — that putting good fuel in a car and burning it up for nothing is the same as shoveling dollars into a fiery furnace. Then again, maybe not. Who knows?

$132 in April was the ‘New $147′. There is less spending money in the greater world, yet more gravity-free ‘finance credit’ in the futures markets. This is like 2008 when there also was credit looking for a place to hide.

Finance is so shaky right now that little is needed to cause a collapse. It could be the $132 was the trigger and that the finance unwind is already underway. Like Arnie Gunderson sez, it’s a deflagration rather than a detonation.

Looking at all the factors and adding the end of the Fed’s easing policy, it looks like commodities will at least take a breather. Will a collapse really happen? Who knows, but here are some clues …

  • People are going broke faster than Chinese and Indians are buying cars.
  • The Chinese economy is also a bubble, when it breaks demand is going to evaporate. China has been very lucky; they haven’t had a severe recession since 1978, when Chairman Deng Xiaoping decided it was okay for Chinese to get rich. The Chinese Finance Time Bomb is ticking.

  • America flirts with austerity. As this dynamic tightens its grip the dollar will strengthen. The austere Eurozone will use less fuel if for no other reason than the mighty Germans cannot waste all of Europe’s fuel.

The strengthening of currencies is a roundabout approach to energy conservation. As dollars and other currencies become scarce, petrol customers will become choosier and hang onto their money.

UPDATE:

I don’t know if this is true because I have not seen it on any of the Japanese news outlets but the rumor has been circulating that Japan is considering shutting all of its nuclear power stations permanently next year. After that period, all power generation would be conventional only.

 

Japan may shut down its nuclear power plants in nine moths

Mikhail Sergeyev (Russia Today)

The Japanese Ministry of Economy announced yesterday that, due to protests by local authorities in the country, the existing nuclear power plants (NPP) may be shut down, and the country’s power sector will become practically nuclear-free by April 2012. To compensate for the reduction in output, Japan will be forced to annually import oil-fuel and natural gas in the amount of $40 billion. Domestic experts are making a significantly higher assessment of Japan’s additional demand for hydrocarbons. However, Russia will hardly have a share of the new “Japanese pie”: almost all of Tokyo’s additional needs will be met by Qatar, Australia and the Arab states.

Today, 19 of Japan’s 54 reactors are operational, and the rest have been stopped for inspection and, perhaps, will not be turned on due to a ban by local authorities. If the local governing bodies continue having a negative stance, then by April 2012 all nuclear power generating units will be shut down as a preventative measure, but will not be returned to operational mode. This possibility, Itar-Tass reports, was announced yesterday by the Japanese Ministry of Economy, Trade and Industry. If Japan does become a nuclear-free state, it will be forced to annually spend approximately an additional $40 billion on the purchase of hydrocarbons and thermal power plants.

 

It is interesting to see how and if this plays out. Certainly, Japan is motivated.

What has to happen?

  • Japan has to develop alternatives including its substantial geothermal reserves.

  • Japan would have to reach the next level of energy conservation.

  • The nuclear cabal would have to be dismantled. The Kan government would have to go- an enabler for big business in Japan.

  • The output constraints on Japanese industry would make decommissioning of plants hard to afford. As Nicole Foss has pointed out, reactors are not compatible with hard times which is where Japan is now.

Right now the Japanese are learning the hard way the costs of cheap electricity. Hopefully others will learn the lesson without having to duplicate Japan’s experience.

9 thoughts on “What Happens Next? Who Knows?

  1. Fourier2020

    China’s management has to know that putting good fuel in a car and burning it up is the same as taking good US dollars earned by virtue of predatory mercantilism and putting them in a fiery furnace for no good reason. Can’t someone in China figure this out? Who knows?
    ============================================================================
    Is China really being managed? I doubt it. Too many different factions pulling in different directions. The truth is that China’s government is much more scared of its citizens than the US banking-governmental complex is of its surfs. Plus, rampant corruption makes the enforcement of just about anything over there a dubious undertaking.

  2. Ric

    @fourier2020

    “The truth is that China’s government is much more scared of its citizens than the US banking-governmental complex is of its surfs”

    “surfs” I hope the government leaves us “surfs” alone. I love surfing and have decided it is the most sensible response to collapse that I can muster. Yeah, my current spot, Indian River Inlet in Delaware, may or may not fare well in the coming collapse. I am probably bailing/flailing to the west coast after potato harvest in late summer, but it will be to a place that has waves.

    Steve – I remember a comment you left over at TAE a few days ago with some depressing overtones, but, like almost all of your writing and analysis, is right on:

    “I personally don’t care about global warming. I’m old, I don’t have any children and I avoid those that do. The world will slough off the ‘human plague’ the same way it has sloughed off ice ages, giant bolide impacts, continent shifts and massive volcanic eruptions: humans here today: tomorrow, ‘No Mas’. Who fucking cares.

    It is sad to see something that has been around for millions of years — the world I was born into that I will never get the proper chance to truly understand or appreciate — being shoveled into the furnace b/c some richy- rich pole monkey doesn’t have enough money. ”

    My response to you is: “Dude: move to the coast and learn how to surf.” Virginia gets waves. What more can one do?

    And I owe an apology to commenter Reverse Engineer, whom I think leaves excellent comments here. I misunderstood some things he/she wrote a few days ago (and I had just opened the second bottle of wine) and directed some words that were not warranted. RE – please accept my apology and please keep posting here.

  3. Josh

    Here’s a long term chart of crude oil. This most recent spike from $40 to $110 has been nothing more than a dead cat bounce in the form of a rising wedge. In Elliott Wave speak it would be labeled corrective with the prior plunge from $140 being labeled impulsive. I would not be surprised to see crude at $10 a barrel again by the time this monster wave of deflation finishes breaking.

    http://i56.tinypic.com/292oh3l.jpg

  4. Ellen Anderson

    Hey Steve – I have been off on a bit of a family emergency myself and haven’t been reading TAE. But I like your comment as it was presented here. I have been seething with rage against the people who have been destroying the earth since I watched Lake Erie die after WWII when I was very young. I never thought there would be any justice at all in my lifetime. The criminals who came home from the war and dumped their poisons onto the peacetime world have gone to their just rewards (I hope.) But one thing that keeps me going is the thought that I will maybe live to see it stop. No more highways, no more shopping malls. No more junior getting into the family car and running me off the road while I try to ride a bike or a horse.
    Us old folks are going to see a little bit of how it ends and even if it takes me down with it I will be happy. Some of the earth will endure if we can shut down the nuclear plants in time.
    Justice will never be done in the cosmic sense but we are going get a little taste of it. After all, we were complicit weren’t we? At least I didn’t try hard enough for sure though I tried to join any likely looking environmental/political movement and I am still trying.
    I look to your writings for the narrative of how it is all going to go down – this was a good post. Keep it up. I do so understand where you are coming from.

  5. Josh

    What happens next? My guess is we complete the grand supercycle top that Prechter has been warning us about for years and enter a deflationary depression where stocks, commodities, precious metals and real estate become essentially worthless except for their utility value. Not only do I see crude oil going back to $10 a barrel, I think Apple Computer is headed back to that price per share as well. Everyone I know who wanted an iPhone, iPad or iTouch has one already, so where is future sales growth going to come from? Sure, there are a few fanatics overseas who would give an arm or a leg or a kidney for one of those gadgets, but not enough to keep the stock price in the stratosphere forever. Here’s the chart:

    http://i53.tinypic.com/2070s3l.jpg

    And for those of you who don’t believe that AAPL could come crashing back to earth, take a look at a long term chart of Xerox, the Apple of its day:

    http://i52.tinypic.com/szc57l.jpg

  6. Loveandlight

    This is just my “gut”, but I just have this feeling that after this summer, it’s going to be all downhill in a universally manifest way.

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