If the foundation of the financial system is debt… and that debt is backstopped by assets that the Big Banks can value well above their true values (remember, the banks want their collateral to maintain or increase in value)… then the “pricing” of the financial system will be elevated significantly above reality.
Put simply, a false “floor” was put under asset prices via fraud and funny money.
Consider the case of Coal.
In the US, Coal has become a political hot button. Consequently it is very easy to forget just how important the commodity is to global energy demand. Coal accounts for 40% of global electrical generation. It might be the single most economically sensitive commodity on the planet.
With that in mind, consider that Coal ENDED a multi-decade bull market back in 2012. In fact, not only did the bull market end… but Coal has erased virtually ALL of the bull market’s gains (the green line represents the pre-bull market low).
Those who believe that the global is in an economic expansion will shrug this off as the result if the US’s shift away from Coal as an energy source. The US accounts for only 15% of global Coal demand. The collapse in Coal prices goes well beyond US changes in energy policy.
What’s happening in Coal is nothing short of “price discovery” as the commodity moves to align itself with economic reality. In short, the era of “growth” pronounced by Governments and Central Banks around the world ended. The “growth” or “recovery” that followed was nothing but illusion created by fraudulent economic data points.
We get confirmation of this from Oil.
For most of the “so called” recovery, Oil gradually moved higher, creating the illusion that the world was returning to economic growth (demand was rising, hence higher prices).
That blue line could very well represent the “false floor” for the recovery I mentioned earlier. Provided Oil remained above this trendline, the illusion of growth via higher energy demand was firmly in place.
And then Oil fell nearly 60% from top to bottom in less than six months.
As was the case for Coal, Oil’s drop was nothing short of a bubble bursting. From 2009 until 2014 Oil’s price was disconnected from economic realities. Then price discovery hit resulting in a massive collapse.
Moreover, the damage to Oil was extreme. Not only did it collapse 60% in a matter of months. It actually TOOK out the trendline going back to the beginning of the bull market in 1999.
This is a classic “ending” pattern. Breaking a critical trendline (particularly one that has been in place for several decades) is one thing. Breaking it and then failing to reclaim it during the following bounce is far more damning.
We’ve just reclaimed the line a week or so ago. But unless we hold here, Oil will be dropping down to $30 per barrel if not lower.
In short, the era the phony recovery narrative has come unhinged. We have no entered a cycle of actual price discovery in which financial assets fall to more accurate values. This will eventually result in a stock market crash, very likely within the next 12 months.