Friday May 6, 2011

Oil was especially hard hit by Thursday’s follow-on crash, dropping as low as $99.35 during the North American session, its heaviest drop in percentage terms since April 2009. Crude futures continued to decline on Friday and were recently off over 4%.

Marketwatch.com,  May 6, 2011

We have been warning of extended prices in crude oil, stocks, and commodities in general. The market finally took notice this past week. Here is how it all unraveled.

Ben Bernanke, Head of the Federal Reserve, believes the way to avoid another depression is to flood the world with dollars at near zero interest rates. That policy has not improved employment rates which are now stuck in the low double digits. It has fostered what is called ‘the carry trade.’  Hedge funds and other investors can borrow US Dollars at near zero rates. That is a ‘short’ or bet the dollar will decline. Borrowers have been  selling dollars and buying something else. That ‘else’ has consisted of shares in emerging markets like China, Brazil, and India, as well as commodities.  Silver has soared 60% in the past year. Silver hit its previous all time high of $50, gold has gone to new highs. Absent any shortage of crude oil, it returned to triple digit status. Headlines bemoan $4 gasoline in the midst of an economic slowdown.

Predictably the US Dollar plunged. But this past week it bounced off a slightly higher three year low. And so, everyone who had borrowed dollars realized the game was over. Time to cash out and pay back the loans. Remember how Archie Bunker and son-in-law Meathead were continually getting stuck in the same doorway?  That happened to global traders this past week.

Massive sell orders hit silver, gold, and crude oil, not to mention coffee and copper. As those commodities were sold, dollars were ‘bought’ in that the loans were re-paid.

I chose to track Patterson Energy PTEN as an indicator. Sure enough it peaked just over $31.50 last Friday. Yesterday it closed at $28.37, down about 9%. This is a warning for the Andrews Energy Service Economy.  I have continually warned against expanding  business into this price rally. I hope readers have used the increases in revenue to retire debt and prepare for a pullback. Believe me the pullback has begun!  The 200 week moving average price for  crude at $83 is now a realistic target over the next few weeks and moths. We will experience another 2008 style meltdown?

Oil stopped well short of $145 and PTEN did not hit $35. But that is a negative event, a lower high in technical terms. The speculation and its eventual cost has not ended. Australia and China have overheated housing booms. China has built entire ghost cities in Mongolia. The average Chinese worker cannot afford Chinese real estate. Foreclosures in San Antonio, up to now one of the strongest US Cities, have caused property tax collections to decline for the first time in many years. The unwinding of these world wide real estate speculations from Malaysia to Melbourne will cause other markets to fall. There will be less not more demand.

The Road Ahead for the next year or two is deflationary. Prices will fall. Then, about two years from now,  the result of too much money sloshing around the world will be felt. Prices will soar, interest rates will soar.

For the time being long term US Government bonds are the best safe haven. I own TLT and IEF. The US Dollar will soar via investments like UUP. This will go on until deflation has exhausted the belief that real estate can ever rally in price again. Then about late 2012 or early 2013, inflation will finally take hold. This will happen in a vicious manner ala 1979-1980. The recent run-up in silver and oil is a prelude to what will happen. For now, foreclosure and demand for re-payments will dominate the news.