Oil: Deflation’s Leading Edge

The sun goes up and goes down. A success
without any enhancement whatsoever.

–Gilbert

Dear Maridel, Dave, Jack and Martha,

Mind your businesses, now, deflation is coming. We haven’t seen this in any meaningful way during my 76 years on this earth, but it stands to be a lulu, and getting through it will require that we get our costs down to maybe half of what they are now, no matter how prudent we may have been.

You’re busy with your lives, so you may not see it coming. Google “Williston, ND oil bust” for a preview. A collapse in the oil patch tends to lead the rest of the economy. The 1980-82 crash in oil ($42 a barrel down to $8) preceded the worst recession since the depression.

The difference between now and ’82 is the amount of debt in the global financial system. It is much greater and involves billions more people than 30 years ago. Every nation is borrowed to unprecedented levels in relation to GDP. Deflation is the final chapter in an economic expansion that was  financed with borrowed money.

Borrowed money financed extreme speculation in commodities during the first decade of the new millennium. The story-there is always a story-was that China, Brazil, India and Russia were exploding, economically. Well, they were–on borrowed money. Now China has too many unsold, unoccupied buildings, Russia doesn’t have anything because it is a kleptocracy and the wealth that came from high energy prices wound up in the Swiss and Cypriot bank accounts of Putin’s henchmen, and both Brazil and India have corruption, with assets being diverted to the powerful.

The result is an extreme excess of production in the world and a collapse in every currency against the dollar. To try to keep things going, the commodity producing nations are shipping as much as they can to whoever they can foist it on at any price. China is shipping tons of steel to the U.S., putting a hurt on the American steel industry, and so it goes.

Meanwhile, debt laden consumers in the U.S. and elsewhere are raising their savings rates, not spending. The increase in spendable income from a big drop in gas prices has not resulted in an increase in spending. By year’s end, retail businesses in your town will start feeling this. Outside of the now collapsing oil industry, the biggest growth in employment in recent years has been in the restaurant industry. That’s over, eating out is peaking now and I’d hate to own a restaurant.

The rise in the stock market over the last couple of years is unwarranted, based on the underlying company values. As I’ve said in earlier posts, there are three sources of the flow of funds:

1) Highly leveraged speculation by hedge funds- guys that trade OPM (Other People’s Money), much of it belonging to pension funds desperate to get returns to provide promised benefits. The hedge fund guys extract big fees and have no skin in the game themselves.

2) Share buy-backs by corporations, also with borrowed money, serving to keep the price going up so that the senior suits can exercise outrageous stock option packages.And,

3) Clueless 401k investors, advised by agents also have no skin the game.

The game is being played by sociopaths and pathetic neophytes. If you own any stocks, be sure to put stop losses under your positions.

I’m looking forward to seeing some of you for dinner on Easter Sunday.

Love,

Dad

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