In Jim Cook's Archive


Who knew? It turns out that oil was in a bubble. What causes bubbles? The great Austrian School economist Ludwig von Mises argued that artificially low interest rates and loose money cause bubbles. We saw it in housing and we saw the devastation that Mises suggested would follow the bursting of a bubble. Now we are going to see similar bloodshed in the oil patch. Call it the first casualty of QE gone wild.

However there are plenty of other bubbles to explode in our face. The stock market is a bubble propped up by funny money. The bond market is an even bigger bubble full of newly created dollars. Art and antiques are a bubble. Farmland is a bubble. Government subsidized entities are a bubble. Derivatives trading is a bubble. Big, fat eastern banks are a bubble. Food stamp recipients, disability payees and all the dudes on welfare are bubbles. Anything where growth is financed by funny money is in a bubble.

Ultimately all bubbles burst. Mises put it this way, “There is no means of avoiding the final collapse of a boom brought about by credit expansion.” Mises suggested that we have learned nothing from the historical economic disasters brought about by deficit spending and artificially low interest rates. The fiat money frenzy of today must surely result in “a new catastrophe….more disastrous” than anything in the past.

That brings us back to the oil bust. By the time you read this it could be old news. The oil collapse and its ramifications are likely to unfold quite rapidly. I’m no expert on oil and its finances but some things are obvious. There’s counterparty risk in the futures market. Who’s on the losing side of these oil trades? How great is the loss? When will we know?

Where will the price of oil ultimately go? Oil is a big enough market that governments can’t manipulate the price upward.  Some countries are already selling their oil below $40. What will this mayhem in the oil market do to the high yield, junk bond market that financed the shale revolution? It could be a bloodbath that spreads to the entire high yield market, collapsing junk bond values and crushing equities.

Virtually every asset has been pumped up in value because of QE and money printing. They all face collapse because they are all bubbles. The lone exception is silver which is definitely not in a bubble. It has pure intrinsic value, it’s immensely utilized, silver is monetary insurance and a prudent store of value. In a world that grows riskier by the day, silver is the rock to build your fortune on.

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