Well, I stand corrected again. I thought I had seen it all during the March meltdown in the market and in the economy but apparently I didn't. WTIC collapsed to an inconceivable price of $-50 or so at one point. If oil hit $0 that would be mind blowing enough but to not only go negative but go negative in such size is....there's no word that would do it justice. Apparently this had to do with looming front month expiration of WTIC contracts tomorrow. WTIC futures contracts are settled by physical delivery and apparently there's very little of such buyers willing to take physical delivery as storage is all tapped out and so when long speculators were looking to close their positions there was nobody to sell to and sheer panic and madness ensued. At negative prices, anyone who had the ability to take delivery of oil could been paid to do so, and then sell it risk free in a month at $22 by selling June futures against it. It's fucking pure lunacy.
Asset prices going negative is not supposed to happen...it like breaking the laws of physics. Einstein came up with equations and theories that explains how the universe works, however apparently his equations break down when it comes to black holes. Black holes are the extreme objects of the universe as not even light can escape their gravitational pull. To form a black hole a star has to be compressed to unimaginable extremes. To get an idea of how extreme, let's imagine if the earth was a star; to turn it into a black hole you would have to compress it to the size of a small plum. That's mind blowing stuff.
What we saw in the oil market today and with the stock market last month can only happen in the the upmost extreme of situations, which as we all know is the situation we find ourselves in now given the world economy being offline for a prolonged period of time. We aren't ever supposed to see a fundamentally essential commodity like oil have a negative price or be close to $0 in any way. It's inconceivable, incomprehensible yet it happened.
Bonds are another example of an asset being caught up in a black hole type environment with the US 10 year at 0.60% or so. Just like how light can't escape from the powerful gravitation pull of a black hole, bond yields can't seem to escape the powerful pull towards 0% and possibly below.
If we can see such crazy extremes with oil and bonds, what about the stock market? If shit gets ugly, it could end up really, really ugly. Worse than what the bears even think is possible. I sure hope that doesn't end up happening but quite frankly it can given the situation we are in right now. As stated last post, there's room for the rebound from the March bottom to continue as there is a favorable sentiment underpinning, however, generally speaking there's very poor fundamental underpinning and if the weak fundamentals become too hard to ignore, it will overpower any favorable sentiment backdrop. The action in oil today was a warning shot across the bow as to how fucked up of a situation we are in right now and bad things can get. Tread carefully.
I admit I was too bearish for too long coming out of the 2008/2009 crisis, so I am constantly second guessing my caution now. I keep flip-flopping. On one hand there are so many bears out there it just makes sense to counter that. But as you say the fundamentals are garbage right now. I think the bull case is built on hope.
ReplyDeleteFauci and Co are still saying 12-18mths for a vaccine if we're lucky. Various medical pros I've talked to tell me not to bet too much on this possibility. They're saying 12-18mths is best case. If that (or a workable treatment) is made available, fantastic. I'll go 100% risk-on at that point.
The thing is, I think most people out there are betting on this best case scenario. They're planning to back to work in a month or two and assuming everything slowly starts to recover. But this is a virus we're dealing with. So we either a) beat it with a vaccine/treatment in 12-18+ months, b) it burns out after possibly overwhelming the hospital system or c) we remain holed up in our houses hoping it goes away. I think we're getting close to trying option b. People are sick of watching their world crumble around them.
Now, if we do option b and it's a slow manageable burn that doesn't overload the hospital system, great. Maybe we slow it down by all wearing masks. But if it becomes clear the virus is putting the healthcare system at risk I think the markets will go apeshit at the thought of another potential quarantine. Pandemics historically have arrived in waves. Covid-19 is virulent enough with a low-enough death rate to circulate for a long time. (Deadlier ones like Ebola burn out fast because they quickly kill people before they can spread it.) For the average person it's manageable. But can society accept putting the vulnerable segment of its population at risk? Can society build capacity into the hospital system to manage the overflow? Maybe over time...and maybe that's the answer I'm looking for.
Sorry about the rambling. I'm working this out in my own head and it helps to spew out some verbal diarrhea to try and solidify my thoughts.
Appreciate your comments and no need to apologize! It's good to know at least there's one person out there who may be reading my posts! The main reason I started this blog was to empty and organize my thoughts onto paper so I totally get what you mean by the verbal diarrhea :)
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