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Page added on March 4, 2016
Is The BOJ Quietly Intervening In Oil And Commodities?
As we said last week, the significant highs and lows in markets over history have been marked by some form of intervention (whether it be public or private policy actions). Of course, we’ve been predicting some form of intervention, and soon, to remove the systemic risk posed by persistently weak oil prices.
It just so happens that key markets (oil, stocks, interest rates) all bottomed on February 11, and have move sharply higher, in unison, since.
What happened on February 11? You guessed it. Intervention.
We’ve said that the best suited for the job of intervening to stem the threat of weak oil prices would be the Bank of Japan. They are already in the thick of their own version of QE infinity. They’ve told us clearly they will do whatever it takes to return their stagnating, deflation burdened economy to prominence again. And, after nearly three years of QE, they still have a long way to go. They’ve told us that higher stocks and a weaker yen are two important tools in their plan. And both have been going aggressively the wrong way for them recently, sidetracked by the broad financial market instability of recent months, which has undone some of their work.
So, indeed, the Bank of Japan stepped in on February 11 with some action.
They sold their currency, sending the dollar soaring against the yen. When they intervene in the currency market, they buy USD/JPY (i.e. they dump their currency – to weaken it – and they buy U.S. dollars). What do they do with those dollars? Perhaps they bought oil (oil ETFs, oil stocks, you name it). It so happens, Crude oil bottomed that same day and has spiked 35% since.
Commodities and commodity stocks are now flying higher. The S&P metals and mining ETF is up 60+% in 30 days. The S&P is up 5% in the same period.
There are other very compelling signs that the global economy is not only backing away from the edge but maybe turning the corner.
It’s all being led by metals prices. Copper is often an early indicator of economic cycles. People love to say copper has “has a PhD in economics” because it tends to top early at economic peaks and bottom early at economic troughs. Copper bottomed on January 15 and is up 13% since.
The value of iron ore, another key industrial metal, has been destroyed in the past five years – down 80%. That metal bottomed quietly in December and is up 32% since.
As we’ve discussed over the past weeks, cheap oil, while it puts a few bucks on the pockets of consumers, is a net negative (huge negative) for the global economy at this stage. The longer prices stay low, the closer we get to the edge of mass bankruptcies in the energy sector, defaults of weak oil exporting countries, and subsequently, another meltdown in banking (i.e. financial crisis).
It’s impossible to imagine central banks would stand by and watch an OPEC rigged oil market undo the trillions of dollars of work they’ve done to bridge the economy to this point. With that, and with the behavior in oil prices since February 11, it looks like the oil bust threat may be in the early stages of being averted.
On the note of intervention and policy-driven markets: While most are eyeing the Fed this month and the jobs data tomorrow, the big events of the month are an annual parliament meeting in China this weekend (where we should see more pro growth policy initiatives), and then the ECB and the BOJ in the next two weeks. The ECB is all but committed to rolling out more aggressive stimulus, and the BOJ is in best position to shock markets (i.e. buy stocks).
8 Comments on "Is The BOJ Quietly Intervening In Oil And Commodities?"
Davy on Fri, 4th Mar 2016 6:40 pm
Not sure who is more incompetent Forbes or BOJ but definitely combining the two is a double negative.
twocats on Fri, 4th Mar 2016 8:51 pm
People think there is some natural limit to debt creation (QE or otherwise). But that’s only true in a normal economic system where the scope is limited and can be isolated. I.e. there has to be an alternative place to for capital as it flees the abusing link in the chain. But if all efforts are semi-coordinated, then there’s no limit, especially when the major abusers can create their own currency/debt to make interest payments, cover expenditures, or prop up phony markets.
This coordinate abuse can fail in a couple of other circumstances. Price distortions in key gears of the market is one such path to failure. The lower-for-longerer price in oil is one such distortion that is threatening this debt regime, and forbes is correct in pointing out that it needs to be propped up (according to the logic of this relatively new financial system that’s been put into place in the wake of 2009).
Another path to failure would be the shortage of a critical real good that exposes the over-creation of credit. This is happening in things like the re-inflation of the housing bubble, including astronomical average rent prices around the country. But I’m not seeing any riots over it.
So far I’m not seeing any real danger of a backlash to this abusive regime. I know the right wingers talk in fear of a new global monetary system. Well, hate to be the bearer of bad news, but the regime is essentially in place, and they can make markets more or less dance to their tune. Is there a big enough black swan left on earth that can threaten that? I can think of a couple, but the biggest and baddest black swan of all? Here’s a hint, it starts with a P and ends in L.
Northwest Resident on Sat, 5th Mar 2016 1:39 am
“…they can make markets more or less dance to their tune.”
I imagine that when all the G20 ministers got together in China last weekend, they did a little more than sit around chatting idly about printing presses and plunge protection tactics.
This week we have seen a major surge not only in stocks, commodities and oil, but that surge has been accompanied by a plethora of news releases and public statements that seem to me to be a coordinated barrage of sophisticated propaganda — all meant to bolster confidence, as in, China is going to take care of business and get back on track, oil has hit bottom and is on its way to 55 per barrel, economic growth is here again!!
But just under the surface of that illusion reality continues to chew away. US manufacturing declining for the 15th month in a row. Shipping plunging — “the worst it has been since the Vikings” according to one shipping CEO. Even Greenspan saying that we’re in big trouble.
And behind it all, the core issue, resource depletion especially oil.
Here’s an accurate no-hype representation of the trouble the oil business, and by extension all of us, is in:
David Little, Chairman and CEO of Houston-based DXP Enterprises:
“As you well know, these are very challenging times for everyone in the oil & gas industry and other industrial markets. We are working hard to navigate both the challenges in oil & gas and an industrial recession plus what appears to be continuing softening. Normally, when upstream oil and gas is down the rest of the industrial market is booming, not this time!
This past Friday, we announced our fourth quarter and year-end results. Our revenues were down 17% from a year ago and 27% from the fourth quarter of 2015 versus the fourth quarter of 2014. Fiscal year 2016 has started off even weaker than we anticipated with January sales down an additional 12% from December. Oil and gas related companies across the country have reported sales declines as high as 50% – 60%.
All of this in the midst of declining industrial confidence and performance. Furthermore, the forecast by experts suggests the oil & gas economy will get worse before it gets better. We are currently 20 months into this oil & gas down cycle which is also unusually long for a correction.
No end in sight, because no end to the oil industry’s downfall exists except for the final crash and burn, which is happening right now.
http://www.zerohedge.com/news/2016-03-04/its-depression-disturbing-email-houston-ceo-sent-his-soon-be-laid-employees
twocats on Sat, 5th Mar 2016 1:46 am
Northwest Resident –
a very good, sober assessment.
Apneaman on Sat, 5th Mar 2016 2:44 am
“a coordinated barrage of sophisticated propaganda ”
They just did the exact same thing in Dec in Paris at the COP21 conference. Same leaders working out of the same playbook.
Faith is the duct tape holding whats left of the system together.
shortonoil on Sat, 5th Mar 2016 6:17 am
Oil prices should, by our models, be at this stage in $50’s range for their worse case scenario. They have been running $20 to $30 below that for more than a year:
http://www.thehillsgroup.org/depletion2_022.htm
The most likely reason for the discrepancy is probably the result of Central Bank intervention into the markets. $trillions were printed that had no place to be invested that could generate a reasonable return; much of that money ended up going into non productive endeavors like Shale. The result was construction of huge over capacity that had no organic market. Prices crashed to far below the full life cycle production cost for the majority of producers. Banks do not create money, they print currency, and the result is just robbing Peter to pay Paul. The financial system made $billions; oil is dying.
Shouldn’t it be about time that they take a break from helping everyone out? Much more help will mean that we will all soon be sitting in the dark!
http://www.thehillsgroup.org/
Northwest Resident on Sat, 5th Mar 2016 10:10 am
There is no doubt but that the $trillions in digi-bucks have distorted not only the markets for oil, but most if not all other markets. To the point that they barely resemble “markets” at all.
If anybody wants to know where all those $trillions in freshly minted “money” went, just wait for the stock market indexes to get pulled down by starkly negative economic realities — the resulting “hockey stick saves” on Friday afternoons are vast quantities of those digi-bucks sloshing in to save the day.
But while the stock markets soar and asset prices re-inflate to ever more absurd valuations, the reality on the street grows starker every day, especially for the many thousands who are losing their jobs daily, or graduating from college only to find there is nowhere to go except to the end of the employment line outside the local McD’s, or living in a country that formerly managed to get along “okay” by selling oil or other commodities to the debt-rocket that WAS China.
The REAL economy is like a man dying of thirst crawling across the hot desert toward a mirage of an oasis that seems to always be within reaching distance but remains forever just out of reach.
“…they can make markets more or less dance to their tune.” Absolutely. Too bad they can’t also reverse physical reality at the same time.
Truth Has A Liberal Bias on Sat, 5th Mar 2016 4:17 pm
@ Short
“Oil prices should, by our models, be at this stage in $50’s range for their worse case scenario. They have been running $20 to $30 below that for more than a year:
The most likely reason for the discrepancy is probably that your model is shit and you’re making it up. Publish your model so we can see that your model says what you say it says. You and your Etp model are total crap and what it says varies from comment to comment.
Not so long ago you commented oil couldn’t go above 30. Now its supposed to be 50 and the banks are causing it to price low.
Give me a fucking break!!