If the Global Economy Is Cliff Diving, Why Is Oil Breaking Out?

WTIThe chart on your left shows an impressive rebound in the price of oil as it has pierced through both the 50- and 100- day moving averages. Given signs of continued weakness in the global economy, it’s hard to believe this move represents a true breakout and a return to a bull market for oil. But as I have noted frequently in this missive, all manner of changes in markets could take place once the current post petro dollar system is replaced with a petro-gold system which seems to be the direction the BRICS are heading into.

Let’s review the case for the continuation of a bear market for oil, based on current economic signs that the global economy is continuing on the road to an economic depression.

To begin, here are the headlines from John Williams’s letter sent out this past Wednesday, April 15 and April 17:
• Quarterly Retail Sales and Industrial Production Last Dropped Together in First-Quarter 2009, When Real GDP Contracted 5.5% (-5.5%)
• Real Retail Sales Contracted at 2.0% (-2.0%) Annualized Pace in First-Quarter, Worst Showing Since Depths of Economic Collapse
• Nominal Retail Sales Fell an Annualized 5.0% (-5.0%) in First-Quarter 2015; March Annual Growth Was Weakest Since Economic Collapse
• Annual Real Sales Growth at Recession Level
• Pummeled by Declining Manufacturing and Oil and Gas Production, Industrial Production Fell an Annualized 1.0% (-1.0%) in First-Quarter 2015
• Housing Starts Plunged at Annualized Pace of 31.0% (-31.0%) in First-Quarter 2015
• Real Earnings Fell by 0.4% (-0.4%) in March
• March Year-to-Year Inflation: -0.1% (CPI-U), -0.6% (CPI-W), 7.5% (ShadowStats)
• – First-Quarter 2015 Real GDP Headed for a Contraction

So Williams is calling for the U.S. to enter into the next recession as the government records it. Of course Williams’s work suggests we have never left recession territory since the financial crisis. But his work also suggests that some months from now, that the government statistics, tormented as they are, will reveal we have entered another recession.

NACMPerhaps the most ominous sign that Williams has it right is the massive increase in rejection of corporate credit applications. The decline began in February and then plunged over the precipice in March, registering the biggest spike in credit application rejections on record as shown in the chart on your left! This is especially dire in this Keynesian world because, rather than driven by profits and savings, our economy is driven by the big lie that money can be created out of nothing and growth comes simply by positive attitudes (animal spirits). When there is no credit and when there are no savings and profits, animal spirits can disappear very, very quickly! Now please! Don’t argue with me by telling me corporate profits are strong, because they are not. What we have are cheap money driving stock buybacks and all manner of artificial accounting to make them look good. Moreover, with price discovery destroyed by Federal Reserve QE, such that money flows to the con artists who run our Wall St. gambling casino and Washington-based Military Industrial Complex, honest capitalist profits are very scarce in the American economy these days. But that is another issue.

Let’s get back on track to focus on the topic at hand, namely, the global economy. Remember when we depended on the massive growth in the Chinese economy to pull the world up after the financial crisis? You don’t hear much talk like that anymore and for good reason. The Chinese economy is at best slowing and could be heading for a massive contraction. In any event, here are some charts that make the case for a weakening Chinese economy, which is either the largest or second-largest economy in the world, depending on how you count it.

Malaise

The chart directly above on the left titled “Manufacturing Malaise” shows that Chinese industrial output is at its lowest level since the end of the end of 2008 which was the middle of the financial crisis. The Chart above right titled “Buyer’s Remorse” shows that retail sales in China have collapsed and are now below the lowest level during the financial crisis.

China

As in any good Keynesian/communist government where there is little or no respect for free markets, with capitalism’s hands tied behind its back, what little growth that takes place results from credit expansion, and the worse the economy gets the more pathological credit heroin that is administered. And so, not surprisingly, although the rate of credit growth in China has fallen a bit, it is still well above nominal GDP, as shown on the chart above left, labeled, “No China Deleveraging Yet.” With a dictatorship directing how capital is allocated rather than allowing free markets to allocate capital according to price discovery, the Chinese problem of empty cities is growing worse and worse, as the chart above, labeled, “Room and Board” illustrates.

Major commodity market declines seem to fit this global economic weakness. Oil seems to be suggesting it may have found a bottom and may be ready to rocket higher. Last week I heard a theory about why oil is behaving differently than other commodities at this point in time. I will get to that in a moment. But in the meantime, check out the following charts for key commodities from J Michael Oliver.

copper
Copper is supposed to be the most important predictor of future economic growth. Hence it’s name “Dr. Copper.” Here we see a clear breakdown in copper below $3 suggesting/verifying/predicting future economic weakness. Certainly steel is a key commodity that should do well, especially if the developing world is continuing to grow. But steel too is showing clear signs of breaking down.

Lumber

Then there is lumber, which also should be doing well if the much ballyhooed recovery in housing in the U.S. and around the world is really taking shape. The chart on our left shows weakness in the price of lumber. But Michael’s momentum chart on your right shows a more troublesome future for this key homebuilding commodity and hence for the home construction market.

So, now for the topic of oil. Is this, the most important commodity in the industrial world, ready to start a new bull market? Michael Oliver said this past weekend after WTI closed at $51.64 that we could see a bit more of a bounce upward to $56 or $57. As this was being written, oil was selling at $57.45, so once again Michael hit the nail on its head. But he doesn’t believe the upside for oil will be sustained much beyond its current level.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.