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The Global Commodity Crash Tells Us That A Major Deflationary Financial Crisis Is Imminent

December 11, 2015

The Global Commodity Crash Tells Us That A Major Deflationary Financial Crisis Is Imminent

Global - Public DomainIf we really are plunging into a deflationary global financial crisis, we would expect to see commodity prices crash hard.  That happened just before the great stock market crash of 2008, and that is precisely what is happening once again right now.  On Thursday, the Bloomberg Commodity Index closed at 79.1544.  The last time that it closed this low was 16 years ago.  Not even during the worst moments of the last recession did it ever get so low.  Overall, the Bloomberg Commodity Index is down more than 28 percent over the past 12 months, and it has plummeted by more than half since mid-2011.  As a result of this stunning commodity collapse, extremely large mining companies such as Anglo American are imploding, giant commodity trading firms such as Glencore and Trafigura are in full-blown crisis mode, and huge portions of the global financial system are in danger of utterly collapsing.

In recent days, I have been trying to stress that many of the exact same patterns that we witnessed just prior to the great stock market crash of 2008 are happening once again.  This includes the staggering crash of commodity prices that we are currently witnessing, and even CNN acknowledges that there are parallels to what we experienced seven years ago…

The last time raw materials like copper and oil were this cheap, an economic depression loomed just around the corner.

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry.

But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days.

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Central Banks Have Shot Their Wad——-Why The Casino Is In For A Rude Awakening, Part I

July 23, 2015

Central Banks Have Shot Their Wad——-Why The Casino Is In For A Rude Awakening, Part I

There has been a lot of chatter in recent days about the plunge in commodity prices—–capped off by this week’s slide of the Bloomberg commodity index to levels not seen since 2002. That epochal development is captured in the chart below, but most of the media gumming about the rapidly accelerating “commodity crunch” misses the essential point.

To wit, the central banks of the world have shot their wad. Accordingly, the 12-year round trip depicted in the chart is not about the end of some nebulous “commodity supercycle” that arrived from out of the blue after the turn of the century. Nor, most certainly, is it evidence of the Keynesians’ purported global shortage of “aggregate demand” that can be remedied by an even more extended spree of central bank monetary stimulus.

No, the Bloomberg Commodity index is a slow motion screen shot depicting the massive intrusion of worldwide central bankers into the global economic and financial system. Their unprecedented spree of money printing took the aggregate global central bank balance sheet from $3 trillion to $22 trillion over the last 15 years.

The consequence was a deep and systematic falsification of financial prices on a planet-wide scale. This unprecedented monetary shock generated a double-pumped economic boom—–first in the form of an artificial debt-fueled consumption spree and then a sequel of massive malinvestment.

Now comes the deflationary aftermath. Soon there will follow a plunge in corporate profits and collapsing prices among the vastly inflated risk asset classes which surfed on these phony booms.

So it is worth recounting how we got here. In the first phase, central banks engineered a massive wave of household borrowing and consumption/housing spending in the DM economies which, in turn, ignited an export manufacturing boom in China and among its caravan of EM suppliers. This China/EM export boom eventually over-taxed the world’s existing capacity to supply the raw materials required by a booming industrial economy—hydrocarbons, iron ore, met coal, aluminum, copper, nickel etc.

 

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5 Charts Which Show That The Next Economic Crash Is Dead Ahead

March 31, 2015

5 Charts Which Show That The Next Economic Crash Is Dead Ahead

When an economic crisis is coming, there are usually certain indicators that appear in advance.  For example, commodity prices usually start to plunge before a recession begins.  And as you can see from the Bloomberg Commodity Indexwhich you can find right here, this has already been happening.  In addition, I have previously written about how the U.S. dollar went on a great run just before the financial collapse of 2008.  This is something that has also been happening over the past few months.  Some people would have you believe that nobody can anticipate the next great economic downturn and that to try to do so is just an exercise in “guesswork”.  But that is not the case at all.  We can look back over history and see patterns that keep repeating.  And a lot of the exact same patterns that happened just before previous stock market crashes are happening again right now.

For example, let’s talk about the price of oil.  There are only two times in history when the price of oil has fallen by more than 50 dollars in a six month time period.  One was just before the financial crisis in 2008, and the other has just happened…

Price Of Oil 2015

As a result of crashing oil prices, we are witnessing oil rigs shut down in the United States at a blistering pace.  In fact, almost half of all oil rigs in the U.S. have already shut down.  The following commentary and chart come from Wolf Richter…

 

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