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Of all the crazy market action in the 2007-09 housing meltdown and Great Recession, you know what stands out the most? The fact crude oil prices rocketed to all-time highs.
Between January 2007 and July 2008, crude oil prices almost tripled from $51 a barrel to $147 a barrel. This happened even though the stock market was plunging … the housing market was imploding … banks and brokers were tumbling toward failure … and the global economy was slipping into its worst recession in decades.
Why would that happen? How did that make any sense from a rational standpoint? Well, consider what happened to the U.S. DOLLAR during that same time.
The DXY, or U.S. Dollar Index, tracks the performance of the greenback against a basket of six foreign currencies. The euro has the highest weight at just under 58%, followed by the Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
As you can see in this chart, the DXY started falling off the table at the beginning of 2007. It ultimately tanked from around 85.50 to 71.40. That was the lowest level for the DXY since it was created in 1973.
Sure enough, the move in crude oil is a veritable mirror image. It’s worth noting that other “contra-dollar investments” like gold also took off like a rocket. The yellow metal jumped in price by around $400 an ounce to more than $1,000 an ounce.
That brings me to today. We’ve just seen the failure of the Doha production talks. Iran is jacking up production, threatening a Saudi response. The U.S. is still churning out millions of barrels per day more oil than it did a few years ago (though down from the peak). The latest data suggests the U.S. economy is stumbling badly.
[Read More – The Consequences of Reckless Lending – Mike Larson]
Yet oil just rallied more than 60% off its low in the mid-$20s. And perhaps not coincidentally, the DXY has been wilting right alongside — falling from around 100 in December to 94 this week. It now sits on the edge of a potentially serious breakdown, with some currencies like the Japanese yen really on fire against the buck.
Now I’m not saying the dollar and crude have to move in lockstep again. But it’s worth noting that gold is on fire this year, surging just like it did back in 2007-08. And even though some pundits on Wall Street might tell you otherwise, I don’t think a surge in crude would be bullish for stocks overall.
It sure wasn’t last time, as you know. Stocks imploded in 2007 and 2008. The surge in oil also helped push a struggling U.S. economy even deeper into recession by driving the cost of things like gasoline through the roof.
So if I had to sum up my thoughts, I’d put them this way:
- The dollar looks increasingly vulnerable here. I’ve been long the Japanese yen, and one of my other favorite “safety” currencies, in a couple of my services. They could really explode in value if the dollar falls off the table.
So watch the critical 93 level on DXY to see if that technical support gives way. In the meantime, click here if you want to know what to buy and why in an era of weaker U.S. growth and a major credit market turn.
- Crude could jump if that happens. But if it does so because of the dollar tanking … and the dollar is tanking because the U.S. economy is tumbling toward recession … that sure doesn’t sound like a recipe for higher stock prices.
The only companies that would likely prosper would be my safe yielding, lower-volatility, less economically sensitive gems. Again, you can click here to watch “The Unseen Hand” — and find out how to get specific recommendations.
- One of the best plays would be gold and gold miners. You don’t get the high level of economic/recession risk that oil comes with. But you do get protection against a plunge in the buck, insane monetary policy worldwide, and a blow out in risk spreads or stock market decline.
If you’re looking for more specific suggestions not just from me, but from a trio of noted gold experts, whom I’ve been working closely with — then consider the Money, Metals, & Mining Cruise. It’s scheduled to sail July 10-17, 2016, on board the Crystal Serenity from Anchorage to Vancouver. You can find out more information here, or by calling 800-797-9519 and asking for the special cruise rates that apply.
[Read More – Yet ANOTHER Billionaire Warns About Coming Chaos – Mike Larson]
Bottom line: It’s a mad world out there. But clues to today’s market moves may be found from the last major market and economic bust.
Until next time,
Mike Larson
P.S. Here’s the secret that savvy insiders know and that can make YOU very rich, very quickly: In the past, every time oil prices have fallen this low, this fast … without exception … they have rebounded with a speed and force that leaves investors stunned. And investors who had the foresight to gobble up select oil and energy stocks at rock bottom prices, made vast fortunes virtually overnight. In other words: This is a rare opportunity to make a lot of money … very, very quickly. Click here to learn how to take advantage of this opportunity before time runs out!
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 49 comments }
If you get involved in currency speculation, it’s a good idea to know wether the exchange rates are fixed or flexible.
James: They could be fixed to one currency, whilst flexible to others not tied to that one; or they could be flexible to all. Or like the Swiss Franc to the Euro; fixed today and flexible tomorrow. Money can be made in this last case; but not with 20/20 hindsight.
Even the gold standard allowed some flexibility in currency value. Governments can always find a political reason to change the number of Dumbos per ounce.
The dollar just went higher given The European Central Banks decision. The money market is very unpredictable, tenuous and unreliable. It does not seem that the dollar is crashing but the yen is holding its own, against Japanese monetary policy attempting to weaken it. Oil stocks have been trading in a narrow range lately but appear not to be weakening even though no international production agreement was forthcoming. This is not a Time to rely on singular theories, you must test your strategy against constant prevailing change. The collapse of the Market and America is not imminent, there will be some corrections soon but there will also be strength on the other side come late summer to year end.
Hi Mike
It appears to me as though there are other distractions to consider as well. Ask why would someone influential go to Britain to support the UK staying in the EU. Perhaps many can see that if Brexit occurs then this would hasten the demise of the EEC. The unknown risks of this collapse and subsequent defaults on loans could hurt our own banks. An important consideration for market place stability is keeping the UK in the union so the can, can be kicked down the road a bit longer.
There is a zero chance that the UK will leave Euroland. The electorate are far too stupid and the establishment much too powerful for that to happen. Truth is that people are much more interested in K Kardashians bum in the news. They deserve all they get
Mike,
You do know that oil began to go to the moon shortly after Cheney/bush took office and crashed as they were leaving office don’t you? Easiest bet I ever made as it was so predictable that this would happen as two oilmen took the highest office in America for the first time in our history……
My prediction: 1) No Crash (unless A Republican is elected President and the GOP keeps Congress) and 2) Oil goes below $20 and stays there for a long time……
Trump isn’t in the top 1%, but he is certainly in the 3%. Why would people want to elect him President. You know what would happen. He would naturally set policies that favor – guess who? The other choices are all professional politicians. Republican insiders, or either a Democrat who has proven herself inept and ready to pass the blame to others, or a professed Socialist. There is NO-ONE among the candidates whom I can support. For whatever reason, this nation seems to have stopped producing leadership material. I can only suspect the left leaning educational establishment, with it’s “que sera, sera” attitude.
Actually, I respect the socialist most, of all the candidates. At least he makes no bones about what he is.
Bull’s Eye!
I think voters get exactly the kind of politicians and national leaders they deserve, whether its Hillary Clinton or Donald Trump. What percent they are in is irrelevant.
And sooo did all other commodities not just oil eagle495 but before bush left office we saw single digit prices for oil then Obama was elected and oil shot to the moon again soaring over $110 per barrel but the truth is Obama wanted a gallon of gas to be trading for between $ 9 – 12 dollars a gallon for his clean energy policys to work ,also Obama has doubled the national debt in his time in office to 20 trillion dollars promised a 6%+ growth in our economy for every year he was president another complete liberal fabrication and gutted the social security trust fund by taking $ 800 billion dollars from social security to fund obamacare and promised another 300 billion per yr from the medicare trust fund to fund 3rd world wind and solar programs
Eagle
My prediction: The years of inane monetary policies, treasonous trade treaties, perpetual war/MIC welfare, Reaganomics induced deficits, counterproductive social welfare programs and corporate inspired corruption will at some point overwhelm whoever is elected. A Republican will give the cancer ridden economy more poisonous Voodoo which will hasten its demise. A Democrat will treat the cancer with pain killers and band aids resulting in a living corpse economy.
Let’s call it “The Revenant Theory”. When you look at the poor earnings from a wide array of industries like Intel, Starbucks, and American Airlines I’m not sure there is much any politician can do to fix it. I see widespread support for Donald and Bernie as desperation by a populace totally rejecting the status quo. Like Chuck, I’m really not comfortable with any of the alternatives. We could be reaching the point where there is no place left to kick the can. Jim
Pilot-less Cockpit
I agree. Its the end of the road for conventional Two-Party system. Whatever change may occur in future years, voters won’t have much say in its direction. The political system is now on auto-pilot.
Mike,
Those poverty programs keep dollars in the U.S….I grew up in one of those low income projects set aside for mentally damaged G.I.’s from WW-ll and Korea…… We’d have been living in a tent or our car were it not for those programs… We did not starve and we all prospered and no one in our families lives in poverty anymore…. A lot more folks are on Welfare than in 1981 when the Republicans came to power
The Republican programs have shifted millions of good paying “Middle Class” jobs to Mexico and China at great cost to America….. Thank God, we are now moving to the left where the government looks out for the average citizen rather than the wealthiest 3%….
The huge, bloated socialist programs have us $20 Trillion in debt. THERE WILL be a day of fiscal reckoning because of them.
only in your world are things moving to the left
Mike and chuck,
They called FDR a Communist also….. And yet it worked better than anything in our history….. Only two people in our Presidential history have had this much support from the average American as oppossed to the “Establishment”: FDR and Bernie
At least FDR was a real leader. He had a vision, and induced most people to follow his vision. How many people would follow Bernie? How many think Hilary, Donald, Ted or John have a real vision they would want to follow, for that manner?
Chuck,
Where I am coming from is that NONE of the other candidates have the kind of individual support that Bernie has….. Many millions have come from individual donors with the average donation at about $25.00…. Those are coming from millions of individual donors, rather than the PAC’s that want something back for their niches in America…. Much the same thing happened with FDR…. BOTH looked out for the average American….
Mike
I think your assumptions are skewed in the wrong direction ! The yen is weakening against the dollar today ? Do you need to revisit your theory ?
John
I am now beginning to think that the DNC will at convention time nominate VP Biden as their presidential candidate.
The failure and corruption of both parties and the Washington Establishment are being laid bare for all to see. This is the most unpredictable election if my lifetime. Abraham Lincoln went to the convention with twent per cent of the votes. We could easily see similar results this time. Jim
Mike, you did not mention the Secret Shanghai Accord intended to devalue the Yuan by strengthening the yen and euro against the yuan whilst hiding the yuan’s devaluation by maintaining status quo between the yuan and the USD to avoid yuan capital outflow which would tank markets.
I like J.R.’s comparison of the Big Five monetary families (dollar, yen, yuan, euro and sdr) to the Big Five Mafia families. It’s all politics, and politicians are basically legalized gangsters, when you look at it rationally.
Oil,gold,and silver have had a huge run on the weakness of the dollar. The COT charts show that the commercials ( they are rarely wrong ) have not been this short the metals in years. I expect to see the dollar to bounce off support and rally and with it sharp corrections in gold and silver. As for oil, the supply/demand story is not significantly different now than a few months ago and it will follow the metals down. I agree with Eagle.
Oil will stay low for a long while ( I think the $30’s ) unless we see a ” black swan “
I’m not brave enough to predict immediate oil price moves, but sixty three bankruptcies, with many more to come, are quickly cleansing the market of high priced and debt laden assets. $40 oil is doing the job quite effectively. The market has a history of balancing more quickly than expected. While the current fundamentals indicate lower prices ahead I think the possibility of an upside surprise is much higher than a downside one. Jim
these bankruptcies are the consolidation phase. when it’s over, only a handful of large oil companies will survive. it’s just the life cycle of a business.
I just read where the consumption of proppants (fracking materials) dropped by 50-75 per cent year over year in the Bakken, Marcellus, Permian, and Eagleford. Without the continuous drilling and fracturing of new wells Shale production will fall off the proverbial cliff. People are finally figuring out just how unprofitable this stuff is. Don’t say you weren’t warned. Jim
Just to finish my shale rant I’ll let you do the math. It costs $4-8 million to drill and frac a horizontal shale well. I have seen them as high as $14 million. They produce 50,000-100,000 total barrels of oil. Jim
This doesn’t factor in operating costs, administrative overhead,royalties, environmental compliance, fees, and taxes. I have participated in six Hayensville
Shale wells that have not returned even half their cost. I don’t see how the entire sector can ultimately avoid bankruptcy. Jim
Oh! And if the Democrats win the White House and one or both houses they will ban fracking. Then there is the Paris Accords. Betting on the future of shale Is a fools game. Jim
Sorry, I’m not finished yet. I sell natural gas into the Targa pipeline system every month. Eight years ago my check would have been around $12,000. Today, after transportation and marketing charges, not only did I make NADA, I got a bill for $24. That’s right, I had to pay them to take my gas. If I disconnect I will be charged $100,000 to reconnect later. The most under reported story in America has to be the impending collapse of the U.S. Oil and gas industry. Jim
Jim, here’s hoping that, in a year or so, you are getting those nice monthly checks again, as the Middle East countries are all bankrupt and warring with one another. Of course that would mean we are back to $7 gas – or more. LOL! Maybe I should rethink.
Thanks Chuck, but I have my doubts. Like you I have my stocks and bonds to keep me afloat. I’m really just trying to alert you guys to the real gravity of the situation. Any industry that sees a profit decline of ninety five per cent in a year isn’t in a “slump” but a death spiral. Our February and March run checks should have had a Jolly Roger stamp on the outside to warn us about the toxic contents. I’m not a newsletter editor or media talking head, but one of the people that get the checks and pay the bills. Our debt fueled energy boom was an illusion. It’s time for execs to jump out the tall building ( or drive their SUV into a concrete post). Even giants like Exxon and Chevron will slash their dividends and see their stock prices drop by half. These morons that talk about the “death of OPEC” should be ignored. It is now and always has been about Saudi Arabia. They have singlehandedly brought the U.S. and Russian oil industries to their knees. Now, that’s power folks. Enjoy the $2 gas. When their plan plays out it will be nothing but a pleasant memory. Jim
Jim,
I would appreciate advice. My sons and I own property in the Eagle Ford Shale which is currently leased and producing with little checks to us each month. Is there anything we should do to manage our assets in respect to the climate you presented?
Thanks.
…but we can frack a new well and deliver its oil faster than the saudis can ship us a tanker. and fracking is becoming so efficient the break even is down to $30/bbl and still improving.
Sorry Goldy, that’s all propaganda being spouted by executives that have to borrow more money to stay afloat. Of course they are going to say they can make money at $30. It’s a lie. There has never been a shale company that had positive cash flow, even at $100 a barrel. For fifty years shale has always been more expensive to produce than it’s worth. They found a way to make it produce ten times more but it costs ten times as much to get it. I know I’m one of the few saying this but I assure you that is the inside scoop. Shale will only recover if there is a new batch of suckers ready to throw their money away. This will go down In History as the biggest QE bubble of all time. Jim
Very valuable inside information Jim, thanks
i’ll take your word for it, jim. you know more about oil than anyone i know. thanks for setting the record straight.
also, lest we not forget, fracking is polluting the water suppy and likely the cause of the recent earthquakes in the permian basin. fracking has serious drawbacks.
Thanks Jim I totally agree with your info. Have many friends that worked in williston nd.and and were way up in well known companies and have been layer off for almost 2years greg
MIke, the price of Gold will decline to $800 an ounce in two years and the Yen will follow suit.
Mike, Europe is one terrorist attack or bank scare away from causing the DXY to jump to the 100 level and beyond. The Euro is tenacious and hanging in there, but only by a thread. I agree that commodities are headed up, soon, but it’s going to be because the rise in demand is going to outstrip the pace of the rise in demand for the USD. And if you look, DXY has strong technical support at the 94 level (right now we’re at ~95). For the meantime, I’d remain skeptical on this scenario!
What it all boils down to, is that the fiat monetary system with nothing to back it except good faith, is a complete and utter failure. Faith is not real, and has no more value than the individual assigns to it. Only THINGS or SKILLS can have real value, in the sense that they may be necessary to support life, or make it comfortable and meaningful. Even gold can be only a symbol of real value, but at least it is a thing in itself. You can hold it in your hand, so it is more real than a number printed on paper, or fleetingly transmitted over space.
Jim….thanks for the oil industry info. My good friend is there and tells me similar stuff.
This is just one more indication of the Obama Depression we are entering.
BTW…..dollar is definitely on an uptrend…..yen and euro down. And that SP500 2100 top (+- a few) appears in place. We shall see.
I would like to ask about buying silver what do you think?
also why , craig do you think that the voters get what they deserve? I think no one that sees what is happening to America would vote for Hillary. so who would you vote for? I think the voters should have the entire say no matter who they vote for.” by the people for the people: what a joke the democrats are so crooked they will probably win and there goes the rest of America to hell
Mike,
This article from brookings theorizes that the increae in oil prices 2007-2008 was caused by supply/demand imbalance. Does that influence your thinking.
http://www.brookings.edu/about/projects/bpea/editions/~/media/Projects/BPEA/Spring%202009/2009a_bpea_hamilton.PDF