Jul 30/15 – Help! I’ve fallen and can’t get up

2015-07-30 9am EDT  |  #AUD #CAD #crude oil #Fed #Gartman #gold #PBOC #world trade

Over the past half dozen years, world trade volume has been in a steadily increasing uptrend. After the 2008 credit crisis, the global economy had been quietly healing, with quarter after quarter, one foot was put in front of the previous one, resulting in steady progress.

Yet something changed starting at the end of 2014. The year end reading of trade volume ticked at an all time new high, but we have headed straight down every month since then.

Is this simply a correction, or the start of something more sinister? Are we about to tip over into a full blown global recession, or this a pause that refreshes?

To some degree it will depend on the policy responses from a couple of the larger Central Banks. Specifically how the Federal Reserve and the People’s Bank of China reacts to this global slowdown will determine if this trend of declining trade continues. The rest of the world is desperately trying to stimulate, almost every other Central Bank is easing, but if these two juggernauts keep leaning towards relatively tight monetary policy, then it will be difficult for the world economy to resume its upward trajectory. The US economy represents 22.5% of the world GDP, while China has 13.5% share. That’s more than one third of the world economy. Since China has a soft peg to the US dollar, to a certain degree they share monetary policy. The two largest economies in the world are in the process of tightening (or at least financial conditions are tightening to their rising currencies). No wonder world trade is slumping. As I have stated too many times, although the US economy might be slogging through this development, it is wreaking havoc on the rest of the world. My suspicion is that the pain is even worse than it appears…

Crude oil

Last year’s collapse in the price of crude oil was brought on when the Saudis turned on the supply tap and purposely left it flowing even as the world inventories began overflowing. Over the course of four months, crude oil plunged from the mid $90s to all the way down to $43. The bearishness towards crude oil hit a feverish pitch, with ‘legendary’ trader Dennis Gartman, epitomizing the overwhelmingly negative sentiment when he declared ‘crude will go the way of whale oil’.

In the frenzy of the decline, the Saudis refused to convene an OPEC meeting to curtail production, but they stated they believed that $60 was a fair price. At the time oil was trading sub-$50 and ‘legendary’ traders like Gartman were still forecasting its demise. I argued that if the Saudis wanted $60, then they would most likely get $60. I thought we would trade $10 on either side of $60 for some months (maybe years) to come. Proving that even a blind squirrel finds an acorn every now and then, I got that one right, and we rallied back up to $60 in May and June.

But the recent commodity collapse has taken its toll on crude oil, and we have declined back down to sub-$50.

Shrewd traders like Stanley Druckenmiller have become more constructive on crude oil over the past few months. I saw a Wall Street Week where Leon Cooperman advocated buying oil company debt. The recent decline has probably caught them off guard, but I don’t think they are completely off base with their bullish analysis.

The recent global slowdown has caused many economically sensitive commodities to stumble. Oil has suffered along with all these other commodities. It has also had the coming Iran supply to deal with.

But I would argue much of the bad news is already ‘in’ the price. We all know the bearish arguments, but what might go right?

What if global growth picks up? What if the US dollar stops rising? What if China steps on the monetary or fiscal gas pedal? What if crude oil ends up having a little more staying power than whale oil?

And most importantly, what if the Saudis are serious about achieving their $60 price?

The Saudis are still the most important oil producer, and although their influence is waning, they still ushered in the swoon from $90 to $45. I am sticking with my call that crude oil will trade $10 on either side of $60. Maybe it should be $10 on either side of $55, but I contend the Saudis are able to influence prices more than the market gives them credit.

Now that oil has dipped sub $50, the Saudis have responded. According to the WSJ:

RIYADHThe world’s top crude-oil exporter, Saudi Arabia, is planning to pull back from record-high levels of production at the end of the summer when domestic energy demand subsides, according to people with knowledge of the matter.

I am not going to over think this trade. Druck and other smart guys think oil is worth a shot with a blue ticket, sentiment is once again fairly negative, and the Saudis have signalled the price decline will be met with supply cuts. I think it is time to pick away on the long side of the crude oil market.

Some ideas for gold investors

Gold has fallen and can’t get up. It is still awfully ugly.

I am bullish on our little yella’ friend, but you don’t need to read another mope on the internet spouting on about the chance to pick gold up on the cheap.

Instead I will leave you with this thought; gold has been plummeting in US dollar terms. There can be no denying that fact. But have you had a look at gold in Australian or Canadian dollars?

Gold priced in CAD or AUD is still up significantly from last year’s lows. If you are a gold company in one of these countries, the price of the commodity you produce is still hanging in there. Yet the market has destroyed all gold companies’ share prices.

I am avoiding gold miners that are based in the United States and instead focusing on buying producing Canadian and Australian names. I think the market is not differentiating enough, and they are throwing out baby, bath water and everything else from the bathroom just to be safe. Time to sift through the remnants on the curb for some great bargains…

Thanks for reading,

Kevin Muir

the MacroTourist