Stock Market Cure Will Create New Problem

US crude oil collapsed for a second day and today it is down again. The severity of the decline in the oil price is a warning that the global economy is no way near restarting soon and the V shape recovery that many have anticipated is an illusion.

We are in unchartered waters really, this has never happened before. The world was not prepared for a collapse in oil demand, and because storage capacity is full, who is going to buy oil if they can’t store it? If you can’t store it, oil has no value, it could down to zero in theory. Of course in theory the oil industry should collapse but Trump will not let it happen, he has already said oil companies will get help. So Trump is bailing out oil companies now, after the banks, the airlines, the farmers….

We live in a world where the value of money has no meaning anymore, how can people trust the dollar when it is being debased? The next crisis could well be a dollar crisis I believe. The US government creates new money to bail out companies and individuals, we know from past example that countries that have created too much money have seen their currency collapse.

The dollar could lose its world reserve currency status as the large increase in the money supply will frighten holders of US treasury bonds and other dollar denominated assets. If the dollar is at risk bond holders will demand higher yields, when yields rise people sell bonds. The pressure on the dollar could be tremendous. Gold will benefit from a dollar debasement, therefore gold is a long term buy and we can see gold is at multi-year highs.

Markets are higher this morning partly because Netflix (NASDAQ:NFLX) reported better than expected results, the stock rallied sharply in after hours and because this stock has a big influence on the S&P 500, markets are up this morning. In this period of lockdown people watch more films, obviously Netflix will benefit.

But this bounce in the FTSE 100 and S&P 500 will be short lived. I believe we are in a corrective wave that will take markets lower before we rally again.