Intervention has been the common theme we’ve discussed for the better part of the past two months. And this week, that theme is heating up.
We’ve explained why oil at $30 has posed a threat to the global financial system and global economy. And we explained the parallels of the systemically threatening (current) oil price bust and the 2007-2008 housing bust. But we also noted the key differences, and why and how this “cheap oil” problem could be easily solved, unlike the housing bust.
The easy fix, as we’ve said is intervention. And as we’ve made this case, along the way, we’ve gotten signals that intervention was, indeed, coming.
The Bank of Japan and the European Central Bank stepped in a little more than a month ago and, at least verbally, implying that they could outright buy oil (threatening that there were “no limits” to what they could buy as part of their QE programs).
The seminal moment in the “oil bust crisis threat” was the day Chesapeake Energy, one of the largest producers of oil and natural gas, was reported to be exploring bankruptcy last month. The rumor was immediately denied by the company. But it was that moment, we think, that policy makers realized that Chesapeake could be another Lehman moment for global markets and the global economy.
Days later, the Bank of Japan intervened in the currency markets. We argued that, given the timing and the coinciding bottom in oil, that the BOJ likely used the opportunity to buy oil (either directly or indirectly through ETFs, etc).
Today, just 17 days later, oil printed over $38 today. That’s 46% higher than it traded the day the BOJ intervened in the currency markets.
Meanwhile, we’ve also argued that China could step in and be an outright buyer of oil, to stem the threat to the global financial system. They stepped in and bought oil (and a host of commodities) in 2009. Oil quickly doubled from $32, and went on to trade back to well over $100 again.
On Friday, Bloomberg said that China was in buying stocks in the Chinese stock market (i.e. intervention). And this past weekend the government laid out a growth roadmap that will ensure more aggressive stimulus (both fiscal and monetary). China has been a notable buyer of gold in recent months, and it’s not likely a coincidence that key industrial metals that have been beaten down badly bottomed in the past few months and have been bouncing aggressively since. Iron ore, among them, rose by almost 20% today, the biggest one day gain ever.
So we’ve seen sharp recoveries in key markets that give the appearance that perhaps intervention is already underway. Still, we have the European Central Bank meeting this coming Thursday. Draghi, the ECB chief, is almost obligated now to roll out bigger and bolder stimulus. And then the Bank of Japan will follow with their meeting a week from tomorrow. As we said last week, the market isn’t expecting much from the BOJ, which sets up the opportunity for Kuroda (the BOJ chief) to surprise. These situations give their action more potency, which is precisely what they like.
Bottom line, the central banks have said all along that they stand ready to act. And in recent months, they’ve watched the continued collapse in oil prices take down stocks, which has taken down global confidence, and led to fears of another crisis and recession.
Of course, some will read this and think the world is now dependent on central banks and stimulus. The reality is, it is, sort of. It is to the extent that the world remains fragile and incapable of absorbing another major economic shock. The central banks are in the business now of promoting stability so that the bridge that they built (through trillions of dollars of commitments, bailouts and stimulus programs) can continue to provide the path to recovery for global economies. They can’t afford to see it all derail. But that’s not a signal to run.
Despite what most people think about central bank and government intervention, most of the significant turning points in markets and economies, looking back through history, come at the hands of some sort of intervention (whether it be a public or private policy action/ formal or verbal). As such, historically, the most painful times to buy stocks turns out to be the best time. That can be said for the oil and metals stocks in the past two weeks. Many have jumped 50% to a 100% and likely have a lot higher to go.