Pandemic, Oil Supply Glut, $ madness, Excessive leverage, Money printer going BRRRR.. Have we seen it all?
We are surely living in interesting times! Never in my life could I have imagined being forced by government to stay at home and then during that time, see oil futures trade at a negative price. I mean what the hell was that on Monday?
It did not feel real. I thought sure, oil may trade in single digits, even 0 felt like a far fetched reality. I mean, why would anyone pay to sell something. The low in the chart is just below - $40. I think over time, we will get to know who suffered giant ass losses on Monday but from what I can tell, or have read, someone went long seeing the low price on Monday, and since on the day of expiry of futures i.e. Monday itself, settlement would have involved physical settlement of futures, the person that bought the contract would have had to take delivery of oil. And storage space in US is running out. After finding no storage space or may be storage that was too expensive, the same person would have been forced to close the bet. Now by now we do not know if it was one person, or 1000 but many people probably got badly burnt by their greed to make a quick buck I guess.
Brent was relatively OK but seems to be going the same path. However, I doubt if the same mistake will be repeated by anyone. It was a once in a lifetime opportunity to see such a scenario. I hope it won't happen again.
That does not mean all is well in Oil Markets. Demand has gotten crushed when economies are shut and well, the cuts in supply are just not enough. Storage as I said is running out in the US. I don't know when this stops but it does not look like it will end anytime soon. Shutting an oil well is not easy I guess. I wish we could close a few taps somewhere!
The pandemic has just been a catalyst to expose corporations with shoddy balance sheets, i.e. High debt levels, low cash to even survive 3 months. Households are not in the same league. The American story is that of consumption, fueled by debt and excessive-ness. However, I do not think it is fair to blame household debt levels entirely on people. Asset bubbles are a result of Central Bank policies. Marketing a certain type of American dream will influence the average person to live a lifestyle driven by debt. Also, companies have not done justice by stagnating wages in order to boost the bottom line. It hasn't been easy to be part of the middle class in Developed Nations.
Companies have certainly been exposed and most would have been driven to bankruptcy thanks to lockdowns globally. Most can't sell and even if they can, they can't procure. Demand is low, supply chain is broken and there is little that can be done in terms of producing locally. So, Central banks globally have eased and Governments are taking cues from Mordern Monetary Theory, and are resorting to Helicopter Money.
No, drones are not going to drop cash in your backyard. In the US, you may get a cheque or direct deposit of $1,200 into your bank account. I think that is being upped to $2,000. The US Fed has gone bonkers. Sure, they needed to may be ensure liquidity in financial markets so providing some form of liquidity is OK I think. However buying junk bonds and corporate paper? End of free markets? Probably. It is a shame to see boomers rushing into preserve boomer wealth at the cost of GenX, Millenials and Zoomers!
Now money printer is heating up in most economies going BRRR, BRRR and more BRRR (Hope it stops). However, there is more going on that meets the eye. Even with all the printing US$ is up.
There are many who say $ will get crushed due to all the printing of money but I do tend to side with the side that believes in relative strength -> The US$ is relatively stronger than other currencies. Being the reserve currency, it is in demand and well, with no trade happening, US$ is hard to get. Hence Central Bank swap lines, so that other global central banks aren't forced to sell treasuries or US assets to generate the cash they need. The Fed has an interest rate curve to manipulate, and therefore it is ready to swap crap with relatively better crap it is printing.
There could not have been a better time to learn investing and Finance. Every problem one can think of, has materialized at the same time - Supply shock, demand shock, currency crisis, Oil War, and Supply Chain shock. We may even see a Pensions and Retirement crisis in the coming years. I do not think the economy will recover from what we are experiencing today even in the next 4 to 5 years. If during that time, we hit the peak of Boomber retirement, we will have another problem to deal with! What can one do? Use your free time to read and be prepared. And yeah, Don't put all your eggs in one basket!
