2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.

Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.

We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.

That being said, I haven’t yet seen any indication that the real economy is retracting.

Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.

This should do wonders for the economy.

With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.

A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.

Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.

Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.

Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.

Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.

Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.

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I was hopeful earlier this week that when Saudi Arabia announced they intended to start reining in their above average pumping activity with the sunset of summer, we might see some relative strength in the price of oil.

The market reaction has been to mostly shrug off the new and keep the price of crude oil sliding, so far. The oversupply of oil is a more pressing and immediate weight on the price per volume which is going to have to be alleviated before any pricing strength can take hold.

Despite the continued weakness in oil prices, oil stocks are staging a small relief rally into the weekend, although I cannot say if it will last much longer.

Outside of oil (which for obvious reasons is something of a point of focus for me), my other positions are doing alright. TIS, OMAB, and ALDW are all staging some strength which is taking some of the edge off.

Now, we are in the midst of one of the more beautiful summers we have had of late; turn your screen off and go outside.

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Oh hurray, it looks like deflation is the path forward. All commodities are getting creamed, and no commodity is more commodity-y than oil.

I’m back to flat for the year and feeling as if my head is firmly placed in a vice.

If you had a puppy, I would kick it.

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The Saudi’s are clinging to the past.

The days of them being the variable producer are coming to a close. They see that clearly and are completely freaked out by it. This is a desperate guy move.

The thing about desperate guy moves is…they’re desperate. Saudi Arabia is not putting this genie back in the bottle. American oil production is here to stay. Right now there’s a cost average race to the bottom going on, and a big game of chicken being played with cash reserves.

But US production isn’t going to just roll over and die. These people are fighting for their lives and have been largely successful about it.

I am absolutely positive that we will see some domestic US producers collapse. It would be silly to suggest otherwise. But what comes out the other side is a leaner, slimmer, more efficient US oil operation.

OPEC is dead, folks. The US endeavored to put a stake through the heart of that malediction for 40 years. In the last 5, we pulled it off. They are coming apart at the seams and the Saudi’s, as the ring leader for that little circus, are trying to hold it all together.

They’re not going to succeed.

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I have a working theory that the EURUSD move precipitated the collapse of oil prices (and the strength of the dollar against other currencies more generally), with the currency move starting at the beginning of 2014 and finally being brought to a head in oil prices in the second half of the year.

It is difficult to fully disentangle the parts because everything is so complex and we cannot fully rule out that oil demand is or would have been soft without the dollar strength. Perhaps it would have been regardless.

But seeing the EURUSD fall while oil bids hold up is encouraging, as it at least breaks the conventional trends that have held so well for nine months.

One thing that does strike me; if currency exchanges were the primary cause of the disruption, then you can expect the pricing swing to correct itself abruptly either when those exchange moves halt or, possibly, just because a majority of the damage escalating from the move has been absorbed or priced in and so the continuation of the cause has a diminutive effect going forward.

For the moment, euro-dollar parity feels like a forgone conclusion and it also seems that oil traders have made their peace with that. But maybe it is too soon to tell.

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Everything I own is sharply lower as apparently American’s gaining employment is something to be feared.

I will try to explain this to you. The reason we have had no inflation before now is because even as the monetary supply rocketed to untold heights, the velocity of money was collapsing. All of the deflationists have been harping on the sound money crowd because they believe they can control employment levels by printing ugly pictures of dead people (which is stupid).

Now that employment is regaining its stride, Americans will have more to spend, and you can probably expect the velocity of money to start picking back up. In fact, if you just bother to look at my new position OMAB, flight volumes are surging to vacation destinations as an example.

We have made much ado about the ever higher levels of debt owed by Americans. Well the numbers aren’t really that bad either. Does an extra $300 of credit card debt on average per year really signify the end times? The debt has almost no carrying cost at the moment; even average citizens can take hold of these zero percent interest rates in one way or another.

The point, good sir or ma’am, is that the monetary supply outstanding is still quite a bit larger than it was five years ago and there is no good strategy to unwind that. Employment numbers picking up are the first stride to wage growth which will usher in the final stretch of the recovery – inflation.

And that inflation will probably get out of hand, because the probability of a perfectly controlled, centrally planned recovery is exactly zero.

Don’t be surprised if commodities experience a second awakening in the not too distant future.

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