For the better part of 2014, investors, strategists and the financial media were trying to spot risk asset bubbles ready to pop, created by the Fed’s unprecedented zero interest rate policy and relentless quantitative easing. U.S. Treasuries are certainly in some sort of bubble as a result of said policies, as the Fed has increased the size of their balance sheet by almost $4 trillion since 2008, with no plan to sell. Yet Treasuries remain the one true safe haven asset on the globe. So there no signs of popping there. Some describe equities at all time highs as a bubble. But most valuations remain well below the historical danger zone, despite pockets of clear speculation. Real Estate also has a bubble feel, but housing data has stalled, and housing related stocks massively under-performed in 2014 and it feels nothing like the good ol sub prime times of the prior bubble.
Then there are commodities. The financial crisis required extraordinary measures that have since become extended economic policies in places like China. Headlines like China Fast-Tracks $1 Trillion in Projects to Spur Growth from Bloomberg this morning seem commonplace. This relentless stimulus has created a fairly unique bubble in industrial commodities, producing demand in a place where it otherwise should not have existed given the state of their economy and the realization of the end of a hyper growth phase.
To me it’s no coincidence that crude oil started it’s 50% decline in mid 2014 right as the Fed started tapering QE. The decline in crude and other industrial commodities could be the very asset bubble burst everyone was looking for after ZIRP & QE. Much like what we saw in tech stock’s in 2000-2002, and real estate in 2008/09.
Obviously, the decline in industrial commodities is a combination of things, the end of U.S. stimulus being one major factor. We also had oversupply, lack of demand, the unraveling of the cartel’s influence, currency wars and the emergence of the U.S.’s possible “too big to fail” view of our own oil & gas production. But all that being said, I would expect to see some knock on effects in 2015. If oil can’t rebound in a meaningful fashion soon I think we will see some corporate defaults, then possibly sovereign defaults. That means rising volatility, lower rates and a stronger dollar. In my mind that does NOT make for a palatable buy and hold investment environment for equities.
I would add one more thing on oil. The powers that be in the U.S. deem our oil production a key component to our national security. Meaning that if the oil producers in the Gulf think that they can kill our production with sustained lower oil, then maybe just maybe our government finds it appropriate to support said production at unprofitable levels, weakening our supposed allies (the Saudis) and enemies (Iran) alike. Maybe U.S. oil is too big to fail for reasons other than financial. Heck, there are those who suggest that we waged a few wars in the last 25 years specifically over oil costing hundreds of billions. Why wouldn’t we be preemptive with our own production and keep Americans working while weakening gulf states as a matter of foreign policy?