Oil dropped below $30 per barrel last week. That’s a 12-year low. It’s now down over 70% from its mid-2014 highs.
Peter Fisher shared exceptional insight on oil’s collapse on Bloomberg TV. He’s the former Asian division head of $4.5 billion hedge fund Blackrock.
He moved the conversation past oil’s supply and demand—the red herring most people focus on—to the core cause of oil’s price collapse: the U.S. dollar.
I understand the supply and demand dynamic, but… the monetary cycle has pushed asset prices in one direction. That’s a consequence of what the Federal Reserve has done…
Discussions on price that only focus on static supply and demand are meaningless. That’s because the entire world no longer uses a stable monetary unit of account (like gold).
President Nixon cut the dollar’s final tie to gold in 1971. From 1973 on, all major international currencies have been fiat (paper). And that skews the normal pricing mechanism…
Banks and baseball cards
Think of it this way…
A baseball card company manufactures and sells 10,000 Babe Ruth rookie year cards. They cost $1 each. In his rookie year, no one knows “the Bambino” is going to become one of the all-time greats.
The Babe’s excellence shines through over the years. Demand for his rookie card rises.
By his 10th season, it trades for $10 per card. Higher demand plus limited supply equals higher price. These are normal supply and demand market forces at work.
Then, let’s say a governing body decides “evil speculators” are making it impossible for kids to buy Babe Ruth cards. It orders the baseball card company to start producing enough new “rookie” cards to return the price to $1 per card.
The governing body orders the company to produce more cards if demand increases, or buy them back if demand falls. Either way, the company’s job is to maintain the card’s price at $1.
The U.S. central bank—the Federal Reserve—acts like that baseball card company… only its task is to regulate the value of the dollar.
All the other central banks in the world do the same thing for their countries’ respective currencies. And that means all global currencies are trading against each other in a confusing “dance” of shifting valuations…
Fisher’s Bloomberg comments won’t surprise regular Palm Beach Letter readers. In November’s issue, Tom introduced his subscribers to “the most powerful force in the financial world”: the currency markets.
Tom explained how the U.S. dollar has shifted its long-standing trend of relative weakness. The implications for this move toward new strength are massive… as the world is already finding out with oil…
From Tom Dyson, editor, The Palm Beach Letter: The largest and most important financial market in the world is the global currency market.
Now, most people don’t pay attention to currencies. You might think only professionals trade currencies. Or swindlers pumping crazy foreign exchange (forex) schemes.
But the reality is every time you fill up your car with gas, buy a toy at Wal-Mart, or make a phone call… you’re affecting currency markets.
Currencies are the fabric of global commerce. They’re involved in every single transaction that takes place all over the globe (except where people still barter).
Every 24 hours, on average, $24 billion in cars are sold. Eighty billion dollars in stocks change hands. But $4 trillion in currencies are traded.
Currency markets control all other markets. For example, look at the chart below. It shows the inverse correlation between the U.S. dollar and oil…
Global oil prices are denominated in dollars. The stronger the dollar, the fewer dollars are required to buy the same barrel of crude oil.
I could list more examples, but hopefully you see the point: Currencies pull the strings of the other markets.
So it’s crucial to have your pulse on the currency market. I’ve been monitoring the currency markets for the last two decades. And right now, my pulse tells me something major is happening…
Everyone’s been looking at overvaluation in the stock market… or U.S. national debt… or the Fed’s next decision on interest rates—all useful indicators.
But investors should be looking at the currency market. It drives all these factors. And it controls the financial markets.
Imagine the global financial markets as the gearing system on a bicycle.
The commodity and stock markets are small cogs on the back wheel, spinning fast. And two even tinier wheels spinning extra fast are the futures and options markets.
Then there’s the big cog that moves slowly. It’s the largest cog on the bike, where the pedals are. It makes the other gears spin.
The big cog in the investment universe is the currency market.
Bottom line: When you understand the trends in the currency market, you can make high-probability assumptions about all other markets. All your trading decisions will fall into place after that.
Reeves’ Note: Tom expands upon the directional shift occurring in the global currency markets in a special presentation on what investors should expect in 2016. It covers the cause behind the collapse in oil and how to prepare for (and profit from) the next shoe to drop. Click here to view it.