A secular look at oil and the loonie

Today oil took another drubbing with most other commodities, as the slowing global economy met systemic shocks from collapsing speculative frenzy in China and a surprise “No” in Greece. As dramatic as drops have been so far, it is possible that mean reversion trends here are just getting started.

As shown in this long term chart of West Texas Crude since 1990, a retest of the 2009 lows for crude below $40 is well within reason.  Now that oil is firmly below the secular bull channel that supported it since 2001, a break below the prior cycle low of $37 in 2009 would confirm a fresh secular bear that can weigh on prices and producers for years.

WTIC June 30 2015

The Canadian (and Aussie) dollar dumped along for the ride as short sellers renewed bearish bets on commodity centric economies and odds increased that the Bank of Canada will cut rates again this month.  See:  Would Stephen Poloz risk ‘inflaming’ Canada’s housing and debt with another rate cut.   Unfortunately, the answer is yes, because all central banks ever had to work with was cutting rates as a tool to encourage risk-taking. But because they used that prod repeatedly and recklessly for the past 15 years,  it is virtually impotent now.  The greatest effect is likely on the currency.  The loonie could easily dive toward the .70U$ area in the process (as shown below).
C$ June 30 2015

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Greece takes first brave step to recovery: admits it’s bankrupt

Throngs of Greek people voted today against the oppressive status quo of impossible debt which has been piled on them since joining the EU monetary union in 2001.  The Greeks (and most other countries) never should have given up their own currency in the first place.  The plan was unsustainable from inception.  All the creative accounting and monetary tricks since, have been designed to cover up this reality in order to enrich large corporations and bankers at the expense of everything else, including democracy.  Today’s “no” vote is finally a step in the right direction.

The outcome also underlines the glaring inter-generational divide between young and old all over the developed world today.  Older people are banking on pensions and benefits that they need younger workers to fund.  The age 50+ group has not saved enough for these commitments themselves and their spending levels are naturally falling as they age.  Not only under-saved, record amounts of older citizens are now carrying unprecedented levels of debt, driving them to work into their 70′s and beyond.  In the process, young people the world over are having difficulty finding stable work at a wage that lets them support their own life and household, while paying for the entitlements and public debts amassed.  Something has to give.

Debt was increasingly used as the stop-gap of choice the past 15 years in order to make impossible math seem possible.  Now that gig is up.  Facts must be faced, bad debts written off, entitlements cut and taxes raised.  Whatever else happens, today marked a turning point in Europe and beyond.  The next phase no doubt will be messy and full of uncomfortable negotiations and concessions, but at least it will be more honest, realistic, productive and ultimately healing of the economic plight now hampering us.

Thank you Greece for finally admitting you are bankrupt.  The Emperor is stark naked and now that you admitted it, the rest of the world can too.  As embarrassing and painful as such admissions may seem, truth is the first essential step. As always we must admit, repent and reform in order to recover.

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Human behavior consistent in capital markets

Humans are consistent anyway. Lots talk about the beauty of free markets, but only so long as prices are going up. The higher and faster, the more irrational the pricing, the more confident humans get. But when necessary and inevitable mean reversion begins, the same ‘free market’ lovers start doing everything they can think up to stop price discovery from happening. While policymakers and participants chalk price gains up to their own genius and skill, they are quick to blame conditions beyond their control for the losses that follow.  In the end reality always has its way and reprices assets back below fair value.  By then of course, the masses are not buying but liquidating their losses in horror. We can learn from all of this and do the opposite.  But it takes thinking more than feeling, and a commitment to personal discipline.

The deflating bubble in Chinese stocks is uncannily similar to Nasdaq’s dotcom boom and bust. James Mackintosh, FT investment editor, analyses what we can learn from history and whether desperate efforts by authorities to pump up prices bring any hope.  Here is a direct video link.

Also see: China setting up stock fund to stabilize market.  Funny no one was talking about trying to “stabilize” Chinese stocks after they had shot up more than 100% in 12 months.  It’s only after they start mean reverting at the speed of light that people start wanting to “stabilize” prices at a ‘new permanently high plateau’.  The rule of irrational exuberance in asset markets:  prices typically fall 3 times faster than they rose.  Par for the course.

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Chinese stocks lose 1/4 of value in 13 days

Policy-pumped stock bubbles typically implode at shocking speed to the decimation of participants. China’s round trip nightmare is not over yet and offers lessons for deluded confidence in other debt pumped developed markets. See: Troubling lessons in China’s crumbling stock market.

It is easy to dismiss China’s stock market as nothing but an old-fashioned speculative bubble. But the government’s direct involvement in pumping it up, and its failure to keep it aloft, should have investors concerned about China’s ability to control even more consequential markets.

Chinese stocks crumbled another 6% Friday, despite the government throwing everything but the kitchen sink at engineering a rebound. In fact, it did throw in some kitchen sinks, telling investors they can now use apartments as collateral on margin loans.

Other measures over the past week include an interest-rate cut, a loosening of bank-lending and margin-lending conditions, rule changes allowing pension funds to own stocks and even, according to some reports, state buying of stocks.

So far anyway, what’s resulted is a market that has lost more than a quarter of its value in 13 trading days.

In the end, extraordinary efforts geared to push prices far above fundamental reason end in extraordinary losses, pretty much always. Its only a matter of time. China is learning this lesson now (and counting), other bubbling asset markets around the world are set up to do likewise.

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Gifts of the credit bubble: broke folks far and wide

CBC reports on how a growing number of seniors are declaring bankruptcy. Here is a direct video link.

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Yes or no to math: understanding the Greek referendum

Six hellish months at the center of the European debt mess, bestowed with a seemingly antithetical mandate to keep Greece in the EU while demanding that its lenders write off bad loans, Finance Minister Varoufakis says this Sunday’s referendum will decide whether he continues or resigns. Varoufakis understands math better than most and he knows impossible terms when he sees them. So far, he has refused to pretend and extend despite intense pressure from many sides to do so. Politicians who resign rather than sell out and break their word to those they represent are rare. If Varoufakis quits, Greece will be left to self-serving wolves once more.

Finance Minister Yanis Varoufakis said he’ll quit if Greece votes to accept creditors’ bailout proposals in Sunday’s referendum. He said he would “rather cut my arm off” than sign a new accord that doesn’t restructure Greece’s outstanding debt. Varoufakis expects Greeks to follow the government’s recommendation to reject the bailout proposals, which would require further tax increases and spending cuts in exchange for continued aid.  Here is a direct video link.

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