Oil’s “warning signs”
History reminds us that the great “oil shocks” of 1973 and 1990 had enormous effects on markets and the economy. What’s coming, however, will be much worse. During the 1973 oil embargo, for example, the world faced a 7% oil supply deficit. This led to a 300% increase in the price of oil, a 52% drop in US stocks (over a 2-year period), and inflation of over 12%. Seventeen years later, during the Gulf War, the world saw a similar global oil deficit (7%), a 75% rise in oil prices, and a 21% drop in US stocks. Fast forward to today, however, and we see an almost surreal moment of complete disregard for such warnings, as well as blindness to the financial volcano roaring on the horizon. Since the last tanker passed through the Strait of Hormuz in late February, global oil consumption of 100 million barrels per day has fallen by 13%, as 13 million barrels per day have been delayed due to the “fog of war.” That marks a global oil deficit in 2026 almost double the levels seen in 1973 and 1990, and yet the US stock market (always the last to get the message) is trading near record highs at the time of writing, reports Trust Economics.This is crazy…
Globally, oil reserves are running low, including in the US, whose Strategic Petroleum Reserve is half of its 400 million barrel level. The situation is worse in Asia, India and Africa, where the last oil deliveries through the Strait of Hormuz stopped days ago. This explains why hotels have closed in Mubai, and why fishing boats have run out of fuel off the coast of Thailand. As for Australia, the EU and the UK, their last deliveries through Hormuz were on April 10. Now their leaders are nervously trying to curb demand while hoping for a real and lasting truce in a conflict with Iran that is driven more by a Truth Social account than by professional diplomacy or even a rudimentary understanding of global finance. Even if this conflict were to end right now, the delayed economic effects of these historic energy deficits are and will be extraordinary – this is not a myth but a fact. Oil, which moves the world, also moves the goods that feed and move the world. When oil prices rise, the cost of everything goes up, including food shipped on oil-powered ships and food grown with oil-based fertilizers. Within weeks, we could be facing a humanitarian food crisis in developing economies. At the same time, in the US, the University of Michigan Consumer Confidence Index is near its lowest point, while the S&P is nearing its all-time high, signaling a complete (and tragically comic) disconnect between real-economy indicators and Wall Street’s frenzy, the likes of which we have never seen before. Also unprecedented in history is the surreal disconnect between the “charted” (futures) price of oil and the actual selling price (“dated Brent”) of the product in real time – a gap of over $35. This gap between the real price of oil and the stock market price is a sad attempt by politicians to psychologically suppress panic through… sheer dishonesty. According to Trust Economics, dishonesty as a political practice is nothing new in broken financial regimes, as evidenced by inflation manipulation, recession denial, or the latest frauds legalized on the COMEX. (Incidentally, any government machinery trying to discount the fake price of oil futures risks a massive short squeeze unless this war – and the price spike – is resolved immediately…). Overall, what we are experiencing right now is the worst oil supply deficit in history, set to expose a US stock bubble to record highs, completely disconnected from the real economy, at the same time as a fertilizer/food crisis is about to erupt in the world’s most vulnerable economies.And then there’s the bond market…
But even these dire conditions pale in comparison to what global bond markets are showing. As Trust Economics has been saying for years: “The bond market is everything.” Boring? Maybe. But bonds are absolutely critical. As demand for government bonds falls and yields rise, the cost of borrowing rises. That’s deadly for economies that now run almost exclusively on debt. And there’s no better measure of the cost of debt than the yield on 10-year government bonds, almost all of which are rising like shark fins around heavily indebted countries like the UK, Germany, the US and Japan. But even more remarkable is what’s happening in China, where yields are falling rather than rising. This means that Chinese bonds are in greater demand than US Treasuries, UK Gilts, Japanese JGBs and German Bunds, which means that the era of Western hegemony in bonds – and especially US bonds – is reaching a historic turning point. In the case of the US, the US 10-year yield is dangerously close to the “red line” of recession at 4.6% to 4.8%. With a public debt of $40 trillion, the US simply cannot afford such increases in yields. Regardless of who is at the Fed (which is neither “federal”, nor “reserve”, nor even a real bank), trillions will need to be printed to buy up the unwanted government IOUs.And then comes the devaluation
Even if a “soft default” is attempted through yield controls or bond maturities, such measures will not stop the inevitable creation of trillions in money by the Fed to save the bond markets at the expense of the currency. Simply put, the US will be forced to create money out of thin air to pay off its own debts. Even if peace were declared in the Middle East today, the damage to the debt and the currency was already done long before the Iran crisis.It all leads to gold
The increasingly undeniable erosion of the dollar’s purchasing power and the desperate but unsuccessful measures to maintain its hegemony are beyond question, reports Trust Economics. The US and the dollar will not disappear, but their hegemony is already declining. History reminds us again and again that heavily indebted nations engaged in wars and fiscal mismanagement devalue their currencies to temporarily preserve their political image. This always leads to “temporary prosperity and permanent collapse.” As the dollar loses its power, gold, as it has for thousands of years, will continue to rise in an environment of increasingly irrational dishonesty.Please follow and like us:
