–If you were in charge of manipulating the world’s financial markets today, what would you do? It wouldn’t be an easy job. If my job was to preserve the status quo for just a little bit longer and prevent the dollar crisis from unleashing even more geopolitical stability and falling stock prices, I’d try and get oil prices down. Pronto!
–In just a second, I’ll show you jhow to manipulate oil prices down. It could come in handy if you’re ever asked to rig the market in favour of your elite establishment friends. But the main point I’d like to make in today’s Money Morning – which I’m writing because your normal editor Kris Sayce is away for the day – is this: the chaos in global financial markets is a sign of the endgame in the global currency war. It’s going to get a lot worse before it gets any better.
–What does that mean? I’ll get to that in a second. But you need to understand that today’s events are linked in an evolutionary chain. It’s the evolution of unsound money and its consequences on growth, society, and the world.
–The fossil record of that evolutionary chain includes John Law’s Banque Royale, the world’s first real central bank, and that hideous creature from Jekyll Island, the U.S. Federal Reserve. These institutions are responsible for unleashing inflation on the world through money printing. What follows – economically and geopolitically – is a direct result of the concept and practice of central banking, fiat money, and fractional reserves.
–That all sounds pretty wonky. So what does it have to do with where we are in markets on Friday, February 25th?
–Well, try thinking of it this way. The U.S. housing crash – itself a result of Alan Greenspan’s post tech-wreck credit bubble – exposed the global banking sector as over-leveraged and undercapitalised. The banks transmitted the problem to governments (the sovereign debt crisis) and stock markets.
–Today, it looks for all the world like governments (through central banks) are doing their best to prop up stock markets by driving down the price of oil and precious metals. The stock market is about the only instrument left that the authorities can use to make people feel richer. For Ben Bernanke and his crew of loyal Keynesians, it’s imperative that new money flows into the stock market to keep people feeling wealthy.
–After all, what else is left on the household balance sheet in the Western World? House prices in most of the Western World (Australia infamously excepted) have fallen and destroyed trillions in equity. Wages are falling in the developed world as globalisation commodities labour. It means everyday low prices for goods made from Asia. But it means hollowed out manufacturing industries in mature economies.
–So yes. The only way to keep people from brooding on all that-and their seeming powerlessness to do anything about it – is to keep stock prices high. That makes everyone feel good. And the zeitgeist of the age is that how you feel about things matters more than the underlying reality of what’s really happening.
–Trouble is, when Libyan oil production is down by 75%, people are going to start worrying that high oil prices could crash global growth. A severe oil shortage is just the sort of event to ruin everyone’s day. It would make clear the simple fact that the U.S. dollar crash is going to be a far more disruptive event than the Lehman Brother’s failure of 2008.
–But wait! How about Saudi spare capacity to the rescue!? Oil retreated overnight when the Saudis told everyone that there’s more than enough oil to go around for everyone. The Saudis say that they have more than 4.4 million barrels per day in spare production capacity. With a full-strength Libya pumping out 1.2 million barrels per day, the Saudis would appear to have everything covered.
–See? Nothing to worry about. Stocks rallied and oil and gold fell on the Saudi assurances. Or is that what really happened?
–First, do the Saudis really have the oil? U.S. diplomats privately think the Saudis have over-stated their proven oil reserves by a whopping 40%, according to Wikileaks cables published by the Guardian in early February. This wasn’t exactly news to people who’ve been following the story of Peak Oil for a while. But it might have been news to a lot of other people. Maybe there isn’t as much cheap, easy-to-produce, high-grade crude oil as we thought.
–But the oil price could have fallen overnight for an entirely different reason. The Intercontinental Exchange (ICE) raised margin requirements on crude oil trading for the second time this week. It’s expected other futures exchanges will follow suit. This is similar to action taken on other commodity contracts experiencing unusual volatility.
–Is it a transparent attempt to drive oil prices lower (and stock prices higher) by squeezing out speculators? Or is it a legitimate attempt to squeeze out destabilising speculation by oil traders? Or some of each?
–I asked Slipstream Trader Murray Dawes if he thought the ICE action was an attempt to rig the oil market by squeezing traders. Murray wrote back:
The futures markets do have the right to adjust the margin requirements when the volatility explodes outside of usual levels. A move such as the one we saw in oil markets over the last week would be enough to blow a lot of traders out of the water. I agree that it is a means to lower open positions at a time of high volatility, and thus affect the price. But the clearing house does have to make sure that market players have enough in their accounts to cover losses. If they don’t then everything comes crumbling down
–Murray is a sensible trader, whereas I am tempted to believe regulators are keen to muddle price signals. Why? High oil and energy prices tell the rest of the world there really is a dollar crisis. They tell investors and traders that Ben Bernanke’s policies are inflationary…and that inflation is already a serious and politically destabilising problem in countries vulnerable to food and fuel inflation.
–But the jury is still out on this line of analysis. So I’m going to step away from it, put some more thought into it today, and send you some bonus oil coverage this weekend. Stay tuned.
–In the meantime, keep an eye out for March 11th. Facebook groups are popping up and calling for “a day of rage” in Saudi Arabia. This, of course, is what the oil market fears most: that the currency crisis roiling the Middle East makes its way to the world’s indispensable oil producer. Don’t count on oil prices being down for long.
Dan Denning
For Money Morning Australia
{ 12 comments }
← Previous Comments
TRB @ 10 – sound advice.
@8
its not my question.. its #2′s
answer it..
← Previous Comments
Comments on this entry are closed.