A few years ago, a BofA/Merrill analyst posited how the 2014 drop in crude could have similar characteristics to the subprime bust in 2008. Today he updated his thoughts on the aftermath of this bedraggled mess.
The pattern of the decline in the price of oil that began in mid-2014 is remarkably similar to the 2007-2009 pattern of the price decline of ABX, the credit derivative index that referenced subprime mortgages and, ultimately, the U.S. housing market (Chart 1). The ABX history suggests that oil will see more declines in the next couple of months and find a floor somewhere in the low 20s in the March-April time frame. Both the duration of the decline (1.5+ years) and the scale of the decline (100 neighborhood starting price down to the sub-30 neighborhood) are similar. Given that both housing and oil prices were fueled to spectacular heights in the two periods by massive credit expansion, it’s probably more than just coincidence that the respective “bubble” bursting patterns are so similar.
Consider how things tend to work. Denial on what constitutes fair value is a big component of bubbles, on the part of both market participants and policymakers. When perceived “bubbles” burst, markets take their time in steadily shredding views of the perception of fundamental value, as prices move lower and lower. Along the way, many will cite “technical factors” as the cause of the decline, which in some way suggests the price decline may not be real when in fact it is all too real. In the end, the technicals drive the fundamentals, as credit flees and borrowers go bust, and a feedback loop lower kicks in. Lower prices beget accelerated selling, as asset owners need to raise cash. It could be margin calls or it could be producer selling needs, it doesn’t really matter: the selling becomes inevitable and turns into forced selling.
“The systemic margin call of 2008 seems to be back for now, albeit to a far lesser degree.”
It’s worth noting that the hounds of hades are eating away at crude today, now lower by almost 5%.
Janet Yellen PhD has this all under control.
Which analyst was this? Don’t tell me its Legate. -_-
Is it too easy to put on a leveraged short position?
An April bottom seems plausible given current action. Question is will it be a V-shaped recovery or retest later in say, October?
Gundlach: “Crashing Oil is not the cause of market chaos, but a symptom of global econ weakness.”
And how did the charts similar to 07-08 develop? Not by the conditions bears were saying all along while being maligned and excoriated, all now proven to be SEVERELY MISGUIDED YA THINK
showing those who did were actually dumbasses