Editor’s note: Regular readers know our founder, Doug Casey, has warned that a Greater Depression is on the horizon. And while it might be easy to blame any economic crisis on the coronavirus pandemic, Doug is convinced that there are other culprits.
In part one of the latest Conversations With Casey, Doug explains why the virus is just a “manufactured scam”… and how the Deep State will use it to avoid any responsibility for the coming collapse…
Plus, he shares his insights on the action in commodities… including why oil prices recently went negative.
Read on below for Doug’s thoughts… and don’t miss part two of this conversation next week…
Daily Dispatch: Doug, one of the biggest stories this year, perhaps for many years, is what happened to the oil price last month. It went to minus $40 a barrel. Have you ever seen anything like that before? Is there anything that compares to this?
Doug Casey: I trade hog futures. Maybe 20 years ago the price of hogs went to a negative number. You wouldn’t think that was possible, would you?
I mean, a perfectly good hog. How could it be worth less than nothing? It seems as metaphysically impossible as negative interest rates. And it would be impossible in a simpler world, say on a family farm with a few hogs that got the table scraps as a diet supplement. But we’re talking about production on an industrial scale.
It could happen again. Those hogs have to be fed with tons of corn and soy meal every day. But what if an economic collapse makes them unaffordable? What if a month-long truckers’ strike makes them impossible to ship? What are you supposed to do if they have no current value, but they cost you a fortune to maintain? Should you keep feeding them as it gets worse and worse? It’s a similar thing with oil.
The big problem is storage. There are several reasons for this. First, the Saudis and the Russians were fighting for market share, and so they decided to see who’d be the last one standing in a knife fight. They’re the second- and third-biggest producers in the world, and both governments – especially the Saudis – rely on oil income.
They both need as much of the 80 million barrel-per-day market as they can get. But what happens when the demand falls overnight by a third? And the Nigerians, the Angolans, the Iranians, and a bunch of others are in the same situation. The supply side becomes a big problem.
The second thing, obviously related, is this ridiculous hysteria about the coronavirus. It has cut oil usage and it’s not going to bounce back overnight. Especially as the Greater Depression deepens.
That’s a big problem, because when you have an industrial-size operation, you can’t close it down overnight for lots of reasons: technical, financial, and personnel.
For instance, in the case of the US, most of the production is from shale. It’s from horizontal drilling and fracking. All of the shale oil companies are deeply in debt. They can’t stop production, even though it’s unprofitable for them at under $30 a barrel.
At least if they can peddle the oil at $20, or at any price, they’re getting some cashflow. If they stopped producing, they have zero cashflow, but most expenses remain. It puts them between a rock and a hard place.
The reason it went to negative numbers is all this oil is still being produced. It’s a Sorcerer’s Apprentice situation. They can’t stop it easily, and it needs to be stored – which also costs money. Even disregarding the financial and personnel part of the equation, they don’t want to stop producing for technical reasons.
It’s like if you put a car up on blocks for the winter. When you get back in the spring, you might find that you’ve got birds roosting under the hood and your gasoline has gone bad.
Where are they going to put all this oil? They’ve filled all the tanks, they’ve filled all the tankers, the pipelines are full of it, and it’s still being produced. The daily cost for use of a VLCC supertanker, to store it, is now around $150,000 a day, up from $5,000 a few years ago. It’s actually very interesting. The price of tankers is more volatile than that of oil itself.
Daily Dispatch: Do exchange-traded funds and other financial engineering play some part in this? I’ve seen elsewhere that the US Oil Fund (USO) ETF has to roll its futures contracts each month, and it always does so either one or two days prior to expiry. It means that something like 100 million barrels of oil in those contracts are on the line.
I bring this up because we’ve seen ETFs causing problems at other times. A couple of years ago, there was the Short VIX ETF that suddenly went from $100 to zero overnight. It was an ETF betting against volatility when there was no volatility in the market. So when volatility came out of nowhere, it went to zero. Do you have a take on how this and other kinds of financial engineering has an effect on markets and prices?
Doug Casey: The problem with many ETFs is that they don’t own the physical commodity, they own futures contracts. Futures contracts are financial instruments, subject to different influences than the bulk commodity itself. The whole country is now built on financial engineering. Something like 20% of the market is financial stocks. I don’t know what it “should” be, but a lot less in an economy geared around production, as opposed to paper shuffling.
It’s actually rather ridiculous. The action, and the big money, is now in finance, where people are just trading paper with each other – “Hello, New York, buy. Hello, Chicago, buy. Hello, Los Angeles, sell – New York and Chicago are buying.”
It’s mainly the fault of a fractional reserve banking system and the Federal Reserve. The whole US economy is over-financialized, because the dollar is now nothing but a trading sardine. In fact, the whole country now depends on the Federal Reserve – an institution which should never have been created, and should be abolished. They’re creating trillions of new dollars to bail out a myriad of failing entities, including the US Government itself.
I play poker. Sometimes in a game a losing player “goes on tilt,” which is to say they start acting irrationally, trying to get out even by making crazy bets because they’re so far behind. The US Government is on tilt.
And of course, the main winners are going to be the Deep State guys, as usual. They’ll be first in line to get their share of the trillions, long before some table scraps filter down to the little people in the hinterlands.
Among the big winners will be professional scam artists and assorted other criminals. They’re quick on their feet, and with all these trillions being thrown around willy-nilly in a matter of weeks, they’ll figure out how to steal scores of billions outright. You can’t possibly know where you’re going to put trillions of new dollars in such a short time. I’m sure that there are going to be many new Nigerian billionaires in a couple of months.
Daily Dispatch: Just getting back to commodities for a moment. Could the situation with oil happen with other commodities? Could it happen with cattle, beef, corn, and all sorts of other commodities? If people are consuming less, they’re eating out less, and they’re buying fewer clothes. Won’t that affect other commodities?
Doug Casey: It could, despite the fact commodities are close to all-time lows in real terms. But, as I’ve explained numerous times before, lower commodity prices are probably the longest trend in financial history.
Remember, one of the three definitions I use of a depression is a time when serious distortions in an economy are unwound and liquidated. The long-term distortion here is that debt and inflation have made people think, and act, like they’re richer than they really are. So instead of eating beef, many will move down to pork, and from pork to chicken, and chicken to beans, and beans to dumpster diving.
Speaking of chickens, people used to trade broiler chickens. If they still traded broiler chickens, they’d be a good bet for a price collapse because the breeding cycle for birds is so short. Furthermore, the birds are put in banks of tens of thousands together. If the distribution chain breaks down at any point, you’ve got a huge problem.
It’s the same problems with hogs, and it could still happen there. US hog producers need to get roughly 60 cents a pound to break even; right now they’re hemorrhaging money. It’s less likely to happen with cattle because a lot of cattle can stay out in the pasture at lower costs – although in the final months of their lives they go to feed lots.
Which leads us to milk. Milk has fallen in price from roughly 16 to 17 cents, to about 10 cents. It doesn’t matter if truck transport is limited, and milk processors are closed down – the cows still have to be milked. So what do you do with the milk? You pour it out.
On the other hand, there are other things that will go into a real shortage. It seems certain that farmers will be producing less and earning a lot less. Meanwhile, consumers are paying more, and trillions of new dollars are being created. Which means even more distortions will need to be unwound, making the depression deeper and longer.
I don’t know how many billions of dollars the government’s going to throw at farmers, and some farmers are going to get a lot more of it than others. The politically well-connected farmers, of course, will get a lot more of that money.
Many won’t be able to keep up the payments on their very expensive John Deere tractors, or even fertilizer and seed. And none of the agricultural commodities are profitable right now. Look, corn is $3 a bushel. Nobody’s making money right now. Will a bunch of farmers go bankrupt and be unable to plant crops? It’s entirely possible.
Daily Dispatch: Okay, so that’s the commodities’ side of things. What about the rest of the economy? What’s going to happen next? All the mainstream TV commentators say we need to bailout this industry and that industry, and that we need to issue these loans and these grants, and everyone’s cheering it on.
But what happens next? What happens once they’ve made all these bailouts, and the economy’s still shut down? Will they do more? And how much worse will that make things?
Doug Casey: Right. You and I know that nobody should be bailed out. But we’re an insignificant minority.
The only certainty is that the money will have to come out of the taxpayers’ and savers’ pockets. Just over the last several years, the top executives have paid themselves scores of millions in salaries and bonuses. They’re not going to give that back to the airlines. The airlines also bought back about $50 billion worth of their own stock in recent years. Why? So that management would look good and their options would be worth a lot more money. They can’t “un-buy” that stock. Another way the rich have gotten richer during an inflation-generated stock market bubble.
Anyway, the airlines will cut through their $60 billion, or whatever, like a sharp knife through warm butter.
Look, airlines have gone bankrupt scores of times in the last couple of decades alone. They should just go bankrupt again, punishing foolish investors, not taxpayers and savers. The airplanes will still exist, and the pilots and the mechanics won’t lose their skills overnight. There will just be a change of management and ownership. That’s likely a very good thing.
The bailouts will create huge new distortions in the economy – on top of not allowing the old ones to be liquidated. And as you’ll recall, that’s one of the three definitions that I use for a depression.
The broadest one is it’s a period of time when most people’s standard of living falls significantly – that’s already happening, but it’s just started. We’re definitely in a depression, from that point of view.
A depression is also a time when distortions and misallocations of capital are liquidated. Well, they’re not letting them be liquidated. That will make the depression even worse when they finally are liquidated. This is really serious. This shutdown has created even more distortions, made worse by the government’s helicopter money.
I don’t see any way out of it, other than completely disengaging the State from the economy. But there’s no way that will happen at this point. The problem is greatly aggravated by everybody blaming the depression on the virus. The virus itself is basically a manufactured scam.
Globally, about 400,000 people die from the common seasonal flu each year. And I doubt that the virus will even get that high – it’s just over 300,000 globally now, even though the numbers are being inflated for political reasons. It’s a manufactured hysteria. The biggest one since the witch hysteria of the 17th century.
It’s a convenient excuse for the collapse of the economy. The economy would have collapsed anyway, because of all the distortions caused by the State. But now, they can blame it on the virus. Now they can say it’s really nobody’s fault. It’s not the fault of the government. It’s not the fault of the Federal Reserve. It’s just an act of God that came out of nowhere.
So this is perfect for the government. If I was them, I would look at this thing as manna from heaven. It’s the best thing that’s ever happened to them. Not to mention an excuse for a vast increase in State power. It’s better than 9/11, global warming, and the 2008 financial crisis combined.
Daily Dispatch: So you still say that this virus is no more harmful than many other viruses throughout recent history. It’s just that this time, governments and central banks have seized the opportunity to cover up the terrible economic mess they’ve created?
Doug Casey: There have been thousands of viruses that have cycled through humanity through the ages. Some are worse than others. If you want to see a serious influenza episode, go back to 1918-1919 with the Spanish flu.
That was when about 650,000 Americans died, which would be like 1.8 million dying today. That would be serious. But still, there wasn’t a recession because of it in 1919. Life went on. There was a recession a couple of years later, but that had nothing to do with the flu. That had already come and gone. Furthermore, the Spanish Flu hit mostly people in the prime of life. Covid-19 overwhelmingly attacks the elderly, the obese, and the sick.
The current shutdown, and the resulting hysteria, is entirely unnecessary. Relative to a serious thing like the Spanish flu it’s totally trivial – just a severe seasonal flu. It’s completely insane.
Daily Dispatch: Thanks for your time today, Doug.
Doug Casey: You’re welcome.