Thursday April 23 2020
Crude Oil Kicks off Deflationary Spiral
Definition of MacGuffin
: an object, event, or character in a film or story that serves to set and keep the plot in motion despite usually lacking intrinsic importance
The coronavirus is the McGuffin in the developing deflationary spiral. Alfred Hitchcock was the first to coin the term and used it in his movies. It is distracting attention away from the greater problem. The long economic expansion from the 1932 DJIA low of 42 ended February 12 at 29,586.
There have been three stock market contractions since March 2000. The first was the dot.com induced sell-off, the second was the sub prime mortgage and now we have what is believed to be a virus induced contraction. No doubt the virus is hastening the contraction. In 1929 and 1973 it took a year and then two years for the DJIA to sell off 50%. Since February 12 it only took until March 23,, about six weeks to collapse stock prices 37%.
The FED and the markets responded to the 2000 and 2008 crisis by lowering interest rates to zer and buying billions in US Government bonds As the US Dollar is the World Reserve Currency, the US can print all it wants. And that rate reduction and monetary injection rallied stock and real estate prices. That has not been the case in the rest of the world. Only the US stock markets hit new highs. All the others failed to do so, a mammoth non-confirmation.
The result of this ‘borrow for free party’ has been the creation of ‘too much stuff TMS.’
Leaf through any newspaper. Retail stores are bursting with unsold clothing. Tens of thousands of cars sit unwanted on dealer lots. That inventory will likely put a lid on re-opening car factories. And then there is oil.
Amidst all this excitement, Russia and Saudi Arabia decided to flood the world with oil, apparently hoping to put the US Shale Producers out of business. No one is making any money with oil prices under $40. Today is the expiration date for the current oil contract. As explained here Sunday, the exchange allowed prices to go negative. Typically speculators are not hedging but speculating. As the May contract unwound, those not taking delivery found there were no buyers. And so the price fell to minus $37.63 for the Friday close of $18.27. That is a drop of $55.90, , the biggest one day collapse in the history of oil trading. But with over-supply and no demand from autos, cruise lines, and airlines, one was paying someone else to take the barrels of oil.
For now everything from real estate to sports event tickets are on sale. Supply of everything dwarfs demand. Monday’s close and the pre-market open today have more than wiped out Friday’s 704 point gain. The deflationary spiral collapse has begun.
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