Cheap Oil Is an Expensive Fiction

Finance U Public Finance U
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Originally published at: https://peakprosperity.com/cheap-oil-is-an-expensive-fiction/

Joining me once again is Dave Russell, the CEO of GoldCore.

As always, Dave’s depth of expertise in finance and markets shines through.

The key takeaways are that Investors should closely monitor oil inventories, refined fuel markets, Treasury yields, inflation pressures, and developments in Japan, as these interconnected forces could drive the next major phase of global financial instability.

Dave agrees with my assessment that oil markets are being heavily manipulated by the US government. This is short-term thinking that could easily result in a long-term disaster.

Price signals are vital to the process of balancing demand against supply. Break the price signal, and you risk future dislocations in supplies up to and including actual shortages.

Inflation is back on the menu, and rising long-bond yields are consistent with this idea. How much further could it rise? And how can we each prepare? All this and more in the podcast.

We also discussed:

  • Supply destruction is becoming permanent.
  • Energy shortages are feeding economy-wide inflation.
  • The Strait of Hormuz disruption is having accumulating effects.
  • Government inflation measures understate reality.
  • Oil inventories are approaching critical lows.
  • Central banks are steadily accumulating gold.
  • China is absolutely vacuuming up available gold
  • A futures market delivery crisis is possible.
  • The Federal Reserve has few effective policy options.
  • Japan’s yen carry trade is beginning to unwind.
  • The carry trade has supported global asset prices for decades.

In other words, we discussed a lot because so much is currently happening.

As always, be informed, and be ready to make good decisions based on limited and/or imperfect information.

 

 

Timestamps

00:00 – Disclaimer
00:08 – Opening: Energy access, scarcity & inflation
00:44 – Welcome & introduction of Dave Russell
01:07 – Dave’s background (trading desk, FX, bonds, yen carry experience)
01:40 – War, Iran conflict & cost-push inflation
04:00 – “Schrödinger’s Strait,” spillover risks & propaganda
05:30 – Oil price reaction, mysterious selling & futures vs physical
09:32 – Gasoline/diesel prices in Ireland & Europe
10:26 – Strait of Hormuz flows, missing oil & soaring crack spreads
13:29 – Heating oil, diesel proxies & inflation signals
15:31 – Cushing inventories, open interest & delivery risks
19:20 – US commercial crude & total inventories at multi-decade lows
22:13 – Cost-push inflation chain (energy → food, packaging, transport)
25:16 – Risks of suppressing oil futures & abrupt price shocks
32:14 – Rising bond yields (30-year at multi-decade highs) & fiscal stress
37:47 – Why yields are rising (lost demand, weaponization of dollar, trust)
42:45 – 1970s-style second inflation wave risks
45:57 – Yields up + dollar weak: emerging-market-style signal
47:13 – Outlook for yields & limited policy options
54:43 – Yen carry trade: status, pressures & BOJ independence claims
01:05:05 – Who is selling yen & technical levels
01:07:37 – How a carry-trade unwind would work & market opacity
01:11:27 – Futures market mechanics (ladder, stop-outs, algos)
01:16:33 – Gold: central-bank buying, China flows & paper vs physical
01:18:46 – China suspending individual Shanghai Gold Exchange trading
01:24:00 – Gold’s role in China’s monetary system & long-term strategy
01:29:42 – Current gold demand from Goldcore’s perspective
01:32:42 – Broader reset risks, fiat system limits & hard assets
01:35:39 – Stablecoins / Genius Act as temporary demand patch
01:40:06 – Fort Knox / US gold revaluation comments
01:40:36 – Closing thoughts & allocation advice from Dave

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Let’s see if I got the lesson down correctly.
The FED can do literally nothing to cap/stop rising prices if they are due to a shortage of oil/petroleum (energy). Secondly, higher costs for energy will push through to higher end product prices. Meanwhile, allowing wages to keep up with those prices would add yet another increment (cost push) to price inflation. Thirdly, the public knowledge that inflation will get worse would, itself, add still another increment to higher prices as people rush to spend a declining currency. The net result of this train of logic is that declining affordability will show statistically as declining economic activity and continue until economic activity and energy come into balance again. Printing more dollars would only exacerbate the effects of the third item before mentioned.
Feel free to correct me if I got the lesson wrong.

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I made it through the nearly 2 hours video just to hear it all summarized as “be like China”. :laughing: Crazy times, indeed.

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Doug Macgregor’s latest conversation with Glenn Diesen (here) is dire indeed. He is tolling the bell as loudly as he can, convinced the only path out for the US and Western Europe at this point is through economic collapse, hence social collapse, which he suspects leads to some kind of revolution in both domains.

His sentiments echo so much of what Chris has been saying for years, now, and recently with increasing urgency. My sentiments, too, along with many of us on PP.

Still rather fruitlessly, I’m trying to get my siblings to shed their MAGA eye glaze and take action. If they weren’t family I wouldn’t bother.

On the other hand, I think I have no choice but to get more involved in very local governance. I really just want to tend my garden, but circumstances dictate. We attended a meeting last night that was part of the Vermont process to create regional development scenarios to “guide” towns in updating their own plans. Apart from the typical bureaucratic idiocy that can only come from a top-down process, especially when it touts supporting local planning but ignores local plans in place as it develops its own set of metrics; and apart from the total lack of accountability built into a process that no one from local towns attending these meetings supports or appreciates, and about which there is no avenue to a decisionmaker for the purpose of lodging complaints or engaging in actual constructive conversation; apart from those fatal flaws, there is nothing in this pie in the sky planning that even hints at awareness we’re debating the banquet seating and portions control on the Titanic after it’s hit the iceberg.

Which reminds me of a joke I heard recently: What do you get when you cross the Atlantic with the Titanic? Answer: Half way.

I think we’re there. Anyone not putting on a life jacket right now is destined not just for a cold night but, too often, a watery grave.

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Explains why US did not and will not suffer physical shortages of oil this year as many predicted:

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Scenario:

  • A person is struggling to source physical product
  • They buy futures, perhaps hoping that’s a pool of willing sellers
  • The sellers can’t deliver and cash settle
  • I guess then all hell breaks loose as people realise that the futures markets are no longer linked to physical and they have to phone round scrambling for physical product from those who have it
  • What happens to futures, I’m not sure. Financial bots just swapping money back and forth between them with no real linkage to reality?
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Colonel Macgregor is extremely knowledgeable, experienced, clear-eyed, and forthright. He ought to be President – but he is too smart to do that.

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Either:

  • All the people on this particular podcast circuit are all experts in oil, currencies, investments and all manner of geopolitics; or

  • They just listen to each others podcasts and repeat each other - WMD intelligence style

Who actually has genuine knowledge these days? Or does everyone get it second hand without leaving their computer and with no ability to verify it or come up with their own insights? For example, who has actually been to the middle east lately to see what is happening? No one.

As an aside - the amount of erming and swallowing as he tries to explain the carry trade doesn’t inspire confidence. At least he knows that he can’t explain it (such as why Yen isn’t strengthening as people apparently buy it to unwind carries) though he tries to do so anyway - going with the old “It’s a secret Mr Slammy” style position. Oh ok. No arguing with that.

I shouldn’t be too harsh. You know going into this podcast that he’s going to have taken on board just enough (from other people) to tell a bit of a yarn and end with the conclusion “So buy gold. Oh - by coincidence, I sell gold.” Probably farmed puppies as well :wink:

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Not true. Pepe Escobar, Patrick Henningsen, KJ Noh have been in Iran and/or nearby countries in the last two months. Seyed Marandi lives in Tehran. Alastair Crooke and his wife are each Middle East experts and worked for the British government, and have their ongoing contacts across the region. There’s more. The point is that while it is true these folks listen to each other, they listen to each other because they recognize peer experts with knowledge that overlaps with one another’s long developed, independently of one another, perspectives.

It’s the overlapping shared perspective, coming to similar conclusions from a range of viewpoints and expertise, that makes them each authoritative and trustworthy. At least, as trustworthy as any human can be.

Macgregor has his own areas of expertise, mostly related to military history, US military matters, and domestic politics, in all of which areas he is an expert and has been recognized as such by the US Establishment over decades. However, he listens to experts in a range of other fields (including our own Chris in regard to oil and energy issues), and integrates their findings into his grand forecasts on where we are headed as a nation, and geopolitically.

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Earlier generations have been through hard times — we have been blessed to have had a few decade’s reprieve. As I learned during one river trip, when you end up in white water, paddle faster, paddle harder. The only way out is through. I don’t plan on spending my time listening to the whiners.

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That is an awesome reminder of why we do what we do. Need to let that one bubble to the top on occassion.

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Which is why I was surprised to hear him offering a lengthy take on Bitcoin recently. I doubt he has been studying that for 15 years.

As I say, these talking heads parrot each others stuff a lot without having any more knowledge than we do a lot of the time. Probably so they can get as many appearance invites as possible and more money and visibility.

It’s the attention economy. It’s my fault really. I need to spend less time with all these people, as they’re just repeating themselves and each other at this stage.

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This I agree with. This summer I’ve shortened the time I spend on podcasts significantly because there’s so little actual news. Hearing the same points repeatedly becomes a version of Groundhog Day. And a time suck.

(Macgregor is a bitcoiner, I learned to my surprise awhile back. By no means hardcore, but he does have a stack. Also holds gold, of course. And no doubt has a nice stock portfolio. Playing all sides.)

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I need to follow my advice that I said from the start. “Wake me up when Iran sinks a warship.”

If they can’t or won’t then the whole thing is non-serious semi-BS up until then. Certainly not an “all out war”. Maybe a 4 year grinding theatre/attack on energy (and white men) like Russia-Ukraine appears to be. Rather than “a war” in the sense that we think of them/have been told to think of them. (Tangent alert!) As there is no way that, in WW1, we threw millions of troops into German machine guns until it was felt that enough population reduction had been achieved, and we only then starved them out and killed them. No. It was all genuine stuff and not orchestrated at all.

And my oil longs still haven’t paid off my mortgage!