MacroProfit: OIL

crude-oil2A Saudi Arabian Oil Minister said that his Country could live with oil at $55-$60 a barrel for 8 years. The depth of their wealth was that strong. Most recently another Saudi said there would be no change of production even if oil dropped to $40 a barrel. Fifty-five to sixty, even forty, certainly that all dictates an emergency meeting of OPEC to reign in production?

The most recent Kuwaiti announcement was “No OPEC meeting until June”.

It’s a good old fashion price war and the guys in the desert who used to ride on camels and now ride in limousines have the upper hand. This story will continue to develop as we enter 2015. Overlooked, yet just as and possibly more significant, is the daily implosion of the emerging markets.

Over the past decade cumulative capital flows into these markets has been dramatic. The image has been that a renaissance was taking place in such places as Peru and Latvia. Fast money from foreign investors, in the form of US dollars, rushed into the bond market, the stock market and even the daily economies themselves. Pension plans and Hedge funds found merging markets irresistible. However, the world’s bankers were probably the most aggressive. Led by the Europeans many continued to favor these markets with as much as 50% owned by outsiders.

It could be dismissed as just another consequence of the end of Quantitative Easing if it were not for the fact that emerging markets represent 50% OF THE WORLD’S ECONOMY. As free money stops flowing the issue becomes the growth. Is the growth for real and if it is not-how is interest paid and principle repaid? The other question becomes what if the dollar continues it’s strengthening and payouts have to be made in devalued currency meaning the cost of repayment has just doubled, tripled or quadrupled.

The hot money may have finally realized that the party is over as “the yield spread between high rated emerging markets and US triple-A rated corporate debt has jumped, dramatically doubling in less than three weeks to the highest level since mid 2012.”

As emerging market yields are rising prices are falling and the explosion and demand for those bonds could turn into a rush to the exit with no doors open. In the late 1990’s Russia defaulted and the Asian Contagion was full blown.

The world trembled as 15-20% of the world’s economy was represented by emerging markets. Today it is more than 50% and the trembling could turn into a cold sweat of fear and then the dreaded panic.

The stronger the US dollar becomes the more a global emerging market meltdown is inevitable.

Then the real fun and games begin.

Should you own an emerging market ETF or emerging market mutual fund let common sense prevail and convert to cash before it is too late.

Till next time,


Written by
With his passion for economics Bill Tatro has been entertaining audiences on the radio and in seminars for decades. Bill is an economist that provides weekly paid content to subscribers, and offers a free daily "lite" version as well.