As For Those Fears Of Another Global Economic Collapse

\  “Six months ago it seemed unlikely the world was headed for any sort of repeat of the 2008 financial crisis. But a few recent developments have me worried that the odds of such an odious rerun have risen. The aftermath, once again, would be a massive bull market in gold. And this time around it would be amplified, because the Chinese will be ready to move in with a new monetary system that has gold as a key component…

Before I explain why 2008 is looming more ominously in my thoughts, I want to make it clear I’m not saying the Chinese will implement a gold-centered monetary system only in the event of a full-blown financial crisis. That would be a sufficient but not a necessary condition. China has been planning for a new monetary system in any case: a financial catastrophe or even China’s sense of an impending catastrophe simply would make events move faster. Which is to say that even if my fears of a new financial crisis turn out to be overblown, it in no way weakens the case for a forthcoming bull market in gold.

As For Those Fears Of Another Global Collapse…
As for those fears: one thing that has gotten my attention has been the newly hawkish tone of central bankers. Janet Yellen seems considerably less grandmotherly, lately, as she warns about bubbly markets. What’s striking is that she’s doing so even as many measures of inflation remain below the Fed’s target of a (ridiculously) low 2 percent. And you can make similar comments about central bankers in many other countries. Yes, like the redoubtable John Williams, I believe that inflation is drastically understated. But that’s not the point. What matters is that the Fed’s measure of inflation is very low – and would jump, as it did in the middle of the preceding decade, if oil and food started to surge.

If the Fed already is making noises about inflation, how would it react if food and oil prices start to spike? Perhaps I’m hypersensitive to this question because in 2008 I missed the boat by giving the Fed too much credit, thinking it never would be dunderheaded enough to respond to the sharp rise in oil and other commodities by tightening credit.

I assumed that Bernanke – a student of the Great Depression – would realize that the deflationary impact of rising commodity prices was far more important than their inflationary impact. As early as 2005, writing a book published in early 2006, I had warned that in our highly levered economy, any tightening in the face of sharply rising commodities would lead to a vicious circle to end all vicious circles. The tightening would compound the deflationary effects of higher commodities. The mostly highly leveraged Americans, homeowners in particular, would be the most vulnerable. Americans, up to 2008, had never lived through a broad-based housing collapse. Such a happening, it seemed obvious, would be catastrophic. I noted interest rates would head quickly to zero, and record government expenditures would be required to save the system, assuming it could be saved at all. This seemed so obvious to me that I couldn’t believe the Fed wouldn’t see it, too. And this overestimation of the Fed kept me from fleeing the market despite my own awareness of the risks as oil continued to rise.

Corn & Wheat Limit Up
Now similar conditions are starting to emerge. Agricultural prices soared on Friday with soybeans scoring their biggest single-day gain on record. Corn and wheat were limit up. The latest land surveys show that the halcyon days for crops may have ended with drought conditions in critical parts of the Midwest. I have enough trouble forecasting markets, let alone predicting the weather, but by and large I trust markets, and with Deere, the world’s largest farm equipment company, trading about 20 percent above previous all-time highs, I am betting on a dry Midwest and continued gains in food prices.

A New Monetary System Is Coming

Oil is the real wild card. I’ve been forecasting higher prices for some time, and so far I have not been vindicated. But while my timing has been off, every bit of evidence I see tells me the dynamics for a surge in oil remain wholly and intensely present. Indeed, the longer oil stays at low levels, the drier the tinder and the greater the likelihood of an explosive move. That’s a contrarian view that I’m comfortable holding – because the more conventional view rests on what I see as a misguided faith in fracking. For example a recent post on Forbes argued that production cuts by OPEC and others have been and will continue to be completely offset by gains in fracking. The writer, Gaurav Sharma, concludes: “Remaining net-short is the logical conclusion for me…if higher U.S. production is reflected in official data…there could be one hell of a market slump.”

There are literally millions of data points about fracking. I have touched on some in past interviews, but a few that I missed are compelling. A peer-reviewed article published at the end of 2016 by three Dartmouth professors in conjunction with the National Bureau of Economic Research notes that between 2005 and 2012 (the last year for which data was available) the fracking industry took on an additional 640,000 workers. Meanwhile, fracking has accounted for an additional 4 million barrels or so a day and a comparable amount of extra natural gas.

It Wouldn’t Surprise Me…
Sticking with the figure of 640,000 workers employed by the fracking industry –even though it no doubt has risen since 2012 – it contrasts with the 65,000 employees of Saudi Aramco, whose yearly oil and gas production is about 75 percent higher than our fracking output. Never mind the energy to transport the massive amounts of water, sand, and chemicals needed for fracking – simply consider the amount of energy consumed by 640,000 workers compared to 65,000. Moreover, on an apples-to-apples basis you would have to add more than half a million additional employees to the 640,000 to make up for the 75 percent greater production from Saudi Aramco. In other words, Saudi Aramco production is about 20 times more efficient than U.S. fracking.

It wouldn’t even surprise me, in fact, if fracking produces less energy than it consumes. Right now that doesn’t matter because oil inventories are high and even if the net effect of fracking is to draw them down a bit they will still be high.

Virtually all analysts today are so entranced by the hydrocarbons fracking is generating that they pay no attention to how much energy it requires. My own feeling is that the paper market for oil is way out of whack with the physical market. How long can this blissful ignorance last? With oil demand increasing – courtesy of China and its impact on the rest of the developing world – and currently greater than supply, there is little doubt that our “stony sleep” will be “vexed to nightmare” sooner rather than later.

The “All-In”Signal For Buying Gold
The potential for surging oil, surging food prices, and a hawkish Fed scares the hell out of me. It is too similar to the nightmare we all lived through in 2008. I am convinced, however, that China gets it. If the canny Chinese sense such events are in the offing, they will begin trading an Eastern oil benchmark in renminbi, and they won’t wait too long before integrating gold into a crypto currency that will likely be used to transact much of the world’s commodity trading, indeed, almost all trading of any kind. The launching of that Eastern oil benchmark will be an all-in signal for buying gold hand over fist. It will be the buy signal of a lifetime, indeed, of many lifetimes.”

July 5 (King World News) – Stephen Leeb