We have recently seen a big drop in crude prices and there are talks of 30/40 dollars of crude prices.
Did the US govt engineer the move to hurt Russia? Most people think so and she might have sold reserves in the spot market to push down futures.
Silver has been below the $19/20 level a long way and that level is considered the threshold for a weak economy and sure it is now for Japan and Europe, but stocks keep on rising.
Look at crude prices vs gold, gold has been unusually strong, if there is no inflation, who would buy gold, but the $1200 level seems to hold.
So which is right, gold holds at this level and crude going up soon or crude holds at current level and gold declines?
Another strange factor is platinum [$1193 current price], it has always been more expensive than gold [$1198], why is it now in the same ballpark with gold or even lower in terms of prices.
Many conventional relationships are challenged at the same time, is it because of serious manipulation that past relationships will eventually resurface or this is a new norm for all these metals, commodities and stock prices!
Dow has also been in extra volatility, falling 300 points and rising 300/400 points, is this getting close to the peak as volatility happens at low and high points, rarely in the middle.
Time will tell, but meantime we must caution ourselves to take less risk and patiently wait for more signals to confirm the truth.
With so many anomalies happening, the chance of a 2015 recession or stock pull back becomes not so remote except in the event of a large QE by EU.
19 December 2014
16 December 2014
Bust of US Shale production?
further article from outsider club
guys who want to also read the chart or tables which are a bit out of bound here can email me.
With this huge uptick in domestic oil production, there are an increasing number of reports stating that the U.S. will become energy independent.
According to the article, "The Energy Revolution 'Made In America'":
These forecasts provide a very optimistic outlook for U.S. energy production far into the future... so why should we worry?
The Coming Bust of the U.S. Shale Oil Boom
With all booms comes the inevitable bust. This is no different with shale oil. The majority of shale oil production in the U.S. comes from two fields — the Bakken & Eagle Ford. While production has increased significantly in these two fields, it comes at a huge cost.
The typical Bakken oil well declines approximately 40% per year. That's right — oil wells in the Bakken are declining nearly ten times faster than the global 4-5% average discussed previously.
The chart below shows that the Bakken is losing an amazing 63,000 bd (barrels per day) of production as of December 2013. The trend remains unbroken through today.
This means the oil companies drilling in the Bakken had to add more than 63,000 bd in December if they wanted to increase production... and they did. According to the U.S. Energy Information Administration (EIA), the Bakken added 89,000 barrels of new production in December 2013. If you look at the chart below, you will see the +89,000 bd of new production minus the 63,000 bd of declines to equal a net increase 26,000 bd in December.
You will notice on the left side of this chart that in November, the Bakken was producing a total of 976,000 bd. When we add the 26,000 bd of net new production for December, the new overall total is 1,002,000 bd, or over 1 million barrels a day.
Even though the Bakken is now producing over 1 million barrels of oil per day, take a look how much worse the declines in oil production will get in the next few years. If we assume the current trend will continue, we can see how much production will decline by the end of 2015:
I don't want to get into too many numbers here, but the graph below shows how many new wells have been added in the Bakken since 2007. The total well figures below are for the North Dakota portion of the Bakken, which produces +90% of Bakken oil. A small portion of the Bakken is located in Montana, but the state does not publish monthly updated information.
As you can see, there were only 479 wells producing in 2008. This nearly doubled in 2009 to 891 wells and by last count was 6,447. The total number of wells will have to keep increasing if they want the Bakken to continue to grow.
The huge fall in production that is taking place in the Bakken is also occurring in the other large shale oil field in the U.S. — the Eagle Ford.
The Eagle Ford shale oil field is experiencing an even higher rate of decline than the Bakken. According to the EIA, the Eagle Ford is estimated to have a decline rate of 83,000 bd in December. This is 20,000 bd more than the Bakken, and it will continue to fall even further in the next several years. This is the elephant in the living room that no one in the oil industry wants to talk about — the huge decline rates.
Shale oil fields only contain so many sweet spots and a certain amount of total drilling locations. Moreover, the farther out from the sweet spot the company drills, the less productive the well. So once the sweet spots are exploited and the best locations are drilled, production peaks and declines.
David Hughes, a geoscientist with nearly 4 decades of experience studying the resources in Canada, including 32 years at the Geological Survey of Canada, recently wrote a report titled "The Shale Revolution: Myth and Realities." Hughes forecasts that production from the Bakken and Eagle Ford will peak in approximately 2016. This is only a few years away.
So much for the notion that we are going to have decades of a cheap and abundant domestic oil supply.
Now that we know production from U.S. shale oil fields will more than likely peak within the next few years, keeping the country from achieving energy independence, what about that supposed 100-year supply of natural gas that the shale industry has been hyping in the media?
The U.S. Shale Gas Industry Has Been a Commercial Failure
The subhead line above is an actual statement from another excellent energy analyst that I will get to in a moment. However, I wanted to first list a few of the points as they pertain to conventional wisdom regarding the U.S. Shale Gas Industry from David Hughes' report:
While I see nothing better for the United States than to become energy independent with decades of cheap oil and natural gas, it looks like the shale gas industry is in much worse shape than its shale oil counterpart. This is according to our next shale-hype slayer and energy analyst, Art Berman.
Art Berman, Director of Labyrinth Consulting Services, is a petroleum geologist with 34 years of oil and gas experience, including 20 years with Amoco (now BP) and fourteen years as a consulting geologist. Art has been one of the most outspoken critics of the shale energy hype for the past several years.
Recently, Art gave a presentation to the Houston Geological Society called "Reflections of a Decade of U.S. Shale Gas Plays."
In his presentation, Art discusses the slides below, revealing the truth about the profitability of the Haynesville shale gas field. He says that with natural gas at $4.00 (as they were at the time) there are no commercially viable areas in the Haynesville.
Art shows that at $6.00 natural gas, only 6% of the Haynesville (in yellow) is commercial. This data is significant because the price of natural gas has been trading at a low range of $2-$4.50 for the past three years.
Basically, the companies drilling and extracting shale gas in the Haynesville have been losing their shirts... selling their product for less than it costs to produce
Furthermore, what is taking place in the Haynesville is also occurring in the majority of the other shale gas fields in the country.
The Barnett shale gas field was the first to be exploited in a large way in the United States. Labyrinth Consulting Services did an in-depth study of Barnett, which Art included in a presentation titled "Shale Gas - Abundance or Mirage." In this report, it stated that of the 9,100 wells surveyed (between 2003-2009) of the total 15,000 wells in the Barnett, less than 6% met minimum economic threshold levels.
Moreover, Mr. Berman believes the average break-even price for the shale gas industry is somewhere between $6-$7. This proves that the so-called conventional wisdom that the U.S. will produce natural gas for 10 years below $4.50 and for $6.00 for the next 20 years is pure nonsense.
You see, this is the common theme in the shale gas industry — a reality not understood by the American public. Shale gas wells are suffering the same, or even higher, annual decline rates as shale oil wells. This means the shale gas drillers have to continue to drill more wells each year to keep overall production from declining. By doing so, the industry has brought on a great deal of natural gas supply that has depressed the price.
This is known as the "Drilling Treadmill." Once you start, you can't get off or else gas production falls off a cliff. Interestingly, this turns out to be the brontosaurus in the living room that the shale gas industry doesn't want to talk about.
So how is this non-commercial shale energy disaster impacting the largest shale gas companies? A great deal, as you are about to find out.
The Great Shale Gas Ponzi Scheme
Those in the energy industry probably wouldn't use a term like "Ponzi Scheme" to label what is occurring in U.S. shale gas production; however, I believe it is a perfect description of what is taking place. Because the shale gas companies have to spend an increasing amount of money on capital expenditures to keep production from falling, they are swimming in debt.
The data below also comes from Mr. Berman's most recent presentation. Here we can see that the major shale gas companies — Chesapeake, Southwestern, Devon and EOG — are spending a great deal more money on capital expenditures than they are receiving in cash flow from operations.
The combined capital expenditures from these four major shale gas companies in the five-year period between 2008-2012 was $133 billion, while their operational cash flow was only $80 billion. Thus, their free cash flow was a negative $53 billion. Which means these companies had to acquire additional funds to continue the "Drilling Treadmill."
One of the major problems companies face with capital expenditures in the shale energy industry is that they can't sit back and reap the rewards by collecting a great deal of revenue for many years like companies in other industries are able to do. This is due to the rapid decline of the shale gas wells and the considerable loss of revenue as time goes by. Many of these shale gas wells could be capped and shut after 6-10 years of production.
Also, shale gas fields, just like shale oil fields, have only so many sweet spots and a finite number of drilling locations. So at some point in time (much sooner than later), these shale gas fields will peak and decline. And wouldn't you know it... that's exactly what's happening right now.Bill Powers (another top notch energy analyst), in his recent interview, "Give Up The Shale Gas Fantasy And Profit When The Bubble Bursts," had this to say about the peaking of several shale gas fields:
Very few Americans are aware that the production from these shale oil and gas fields will not continue to grow and last for several decades.
When we look at all the data presented here, it is clear to see that the shale energy industry in the United States is behaving more like a Ponzi scheme rather than a long-term viable economic energy system. Shale oil and gas companies have to spend more money each year to increase production or it will fall off a cliff.
While it is true that there is a great deal of supposed shale oil and gas resources in many countries around the globe, several of the analysts quoted in this report do not believe this short-term U.S. shale revolution can be replicated throughout the world. This is due to several factors, such as the lack of infrastructure, water, and technical expertise, and reduced property and mineral rights.
Once the U.S. peaks in shale oil and gas production in the next several years, there is no Plan B. Art Berman got it right when he made this remark about shale energy during his presentation: "Folks, this isn't a new Energy Revolution.... it's a Retirement Party."
The peak and decline of U.S. and global oil production will have a devastating impact on the world's economies and the majority of paper assets. While some individuals already see the writing on the wall, unfortunately the majority of investors have not yet connected the dots.
guys who want to also read the chart or tables which are a bit out of bound here can email me.
The Coming Bust of the U.S. Shale Oil & Gas Ponzi
In just the past four years, oil production in the U.S. has grown a staggering 46%, adding 2.5 mbd — all due to shale oil production.With this huge uptick in domestic oil production, there are an increasing number of reports stating that the U.S. will become energy independent.
According to the article, "The Energy Revolution 'Made In America'":
- Citibank -- U.S. independence from energy imports could even begin at the end of this decade.
- NIC -- National Intelligence Council -- U.S. could become a significant energy exporter from 2020 on.
- IEA -- International Energy Agency -- U.S .could become a net exporter of gas beginning in 2020, and practically develop into a complete self-sufficient energy provider by 2035.
These forecasts provide a very optimistic outlook for U.S. energy production far into the future... so why should we worry?
The Coming Bust of the U.S. Shale Oil Boom
With all booms comes the inevitable bust. This is no different with shale oil. The majority of shale oil production in the U.S. comes from two fields — the Bakken & Eagle Ford. While production has increased significantly in these two fields, it comes at a huge cost.
The typical Bakken oil well declines approximately 40% per year. That's right — oil wells in the Bakken are declining nearly ten times faster than the global 4-5% average discussed previously.
The chart below shows that the Bakken is losing an amazing 63,000 bd (barrels per day) of production as of December 2013. The trend remains unbroken through today.
This means the oil companies drilling in the Bakken had to add more than 63,000 bd in December if they wanted to increase production... and they did. According to the U.S. Energy Information Administration (EIA), the Bakken added 89,000 barrels of new production in December 2013. If you look at the chart below, you will see the +89,000 bd of new production minus the 63,000 bd of declines to equal a net increase 26,000 bd in December.
You will notice on the left side of this chart that in November, the Bakken was producing a total of 976,000 bd. When we add the 26,000 bd of net new production for December, the new overall total is 1,002,000 bd, or over 1 million barrels a day.
Even though the Bakken is now producing over 1 million barrels of oil per day, take a look how much worse the declines in oil production will get in the next few years. If we assume the current trend will continue, we can see how much production will decline by the end of 2015:
Bakken Oil Production Decline Rate:
- Dec 2009 = -13,000 bd
- Dec 2010 = -20,000 bd
- Dec 2011 = -30,000 bd
- Dec 2012 = -47,000 bd
- Dec 2013 = -63,000 bd
- Dec 2014 = -80,000 bd (estimated)
- Dec 2015 = -97,000 bd (estimated)
I don't want to get into too many numbers here, but the graph below shows how many new wells have been added in the Bakken since 2007. The total well figures below are for the North Dakota portion of the Bakken, which produces +90% of Bakken oil. A small portion of the Bakken is located in Montana, but the state does not publish monthly updated information.
As you can see, there were only 479 wells producing in 2008. This nearly doubled in 2009 to 891 wells and by last count was 6,447. The total number of wells will have to keep increasing if they want the Bakken to continue to grow.
The huge fall in production that is taking place in the Bakken is also occurring in the other large shale oil field in the U.S. — the Eagle Ford.
The Eagle Ford shale oil field is experiencing an even higher rate of decline than the Bakken. According to the EIA, the Eagle Ford is estimated to have a decline rate of 83,000 bd in December. This is 20,000 bd more than the Bakken, and it will continue to fall even further in the next several years. This is the elephant in the living room that no one in the oil industry wants to talk about — the huge decline rates.
Shale oil fields only contain so many sweet spots and a certain amount of total drilling locations. Moreover, the farther out from the sweet spot the company drills, the less productive the well. So once the sweet spots are exploited and the best locations are drilled, production peaks and declines.
David Hughes, a geoscientist with nearly 4 decades of experience studying the resources in Canada, including 32 years at the Geological Survey of Canada, recently wrote a report titled "The Shale Revolution: Myth and Realities." Hughes forecasts that production from the Bakken and Eagle Ford will peak in approximately 2016. This is only a few years away.
So much for the notion that we are going to have decades of a cheap and abundant domestic oil supply.
Now that we know production from U.S. shale oil fields will more than likely peak within the next few years, keeping the country from achieving energy independence, what about that supposed 100-year supply of natural gas that the shale industry has been hyping in the media?
The U.S. Shale Gas Industry Has Been a Commercial Failure
The subhead line above is an actual statement from another excellent energy analyst that I will get to in a moment. However, I wanted to first list a few of the points as they pertain to conventional wisdom regarding the U.S. Shale Gas Industry from David Hughes' report:
- Shale Gas production will continue to grow for the foreseeable future (2040 at least) and prices will remain below $4.50 for the next 10 years and below $6.00 for the next 20 years.
- Shale Gas can replace very substantial amounts of oil for transportation and coal for electric generation.
While I see nothing better for the United States than to become energy independent with decades of cheap oil and natural gas, it looks like the shale gas industry is in much worse shape than its shale oil counterpart. This is according to our next shale-hype slayer and energy analyst, Art Berman.
Art Berman, Director of Labyrinth Consulting Services, is a petroleum geologist with 34 years of oil and gas experience, including 20 years with Amoco (now BP) and fourteen years as a consulting geologist. Art has been one of the most outspoken critics of the shale energy hype for the past several years.
Recently, Art gave a presentation to the Houston Geological Society called "Reflections of a Decade of U.S. Shale Gas Plays."
In his presentation, Art discusses the slides below, revealing the truth about the profitability of the Haynesville shale gas field. He says that with natural gas at $4.00 (as they were at the time) there are no commercially viable areas in the Haynesville.
Art shows that at $6.00 natural gas, only 6% of the Haynesville (in yellow) is commercial. This data is significant because the price of natural gas has been trading at a low range of $2-$4.50 for the past three years.
Basically, the companies drilling and extracting shale gas in the Haynesville have been losing their shirts... selling their product for less than it costs to produce
Furthermore, what is taking place in the Haynesville is also occurring in the majority of the other shale gas fields in the country.
The Barnett shale gas field was the first to be exploited in a large way in the United States. Labyrinth Consulting Services did an in-depth study of Barnett, which Art included in a presentation titled "Shale Gas - Abundance or Mirage." In this report, it stated that of the 9,100 wells surveyed (between 2003-2009) of the total 15,000 wells in the Barnett, less than 6% met minimum economic threshold levels.
Moreover, Mr. Berman believes the average break-even price for the shale gas industry is somewhere between $6-$7. This proves that the so-called conventional wisdom that the U.S. will produce natural gas for 10 years below $4.50 and for $6.00 for the next 20 years is pure nonsense.
You see, this is the common theme in the shale gas industry — a reality not understood by the American public. Shale gas wells are suffering the same, or even higher, annual decline rates as shale oil wells. This means the shale gas drillers have to continue to drill more wells each year to keep overall production from declining. By doing so, the industry has brought on a great deal of natural gas supply that has depressed the price.
This is known as the "Drilling Treadmill." Once you start, you can't get off or else gas production falls off a cliff. Interestingly, this turns out to be the brontosaurus in the living room that the shale gas industry doesn't want to talk about.
So how is this non-commercial shale energy disaster impacting the largest shale gas companies? A great deal, as you are about to find out.
The Great Shale Gas Ponzi Scheme
Those in the energy industry probably wouldn't use a term like "Ponzi Scheme" to label what is occurring in U.S. shale gas production; however, I believe it is a perfect description of what is taking place. Because the shale gas companies have to spend an increasing amount of money on capital expenditures to keep production from falling, they are swimming in debt.
The data below also comes from Mr. Berman's most recent presentation. Here we can see that the major shale gas companies — Chesapeake, Southwestern, Devon and EOG — are spending a great deal more money on capital expenditures than they are receiving in cash flow from operations.
The combined capital expenditures from these four major shale gas companies in the five-year period between 2008-2012 was $133 billion, while their operational cash flow was only $80 billion. Thus, their free cash flow was a negative $53 billion. Which means these companies had to acquire additional funds to continue the "Drilling Treadmill."
One of the major problems companies face with capital expenditures in the shale energy industry is that they can't sit back and reap the rewards by collecting a great deal of revenue for many years like companies in other industries are able to do. This is due to the rapid decline of the shale gas wells and the considerable loss of revenue as time goes by. Many of these shale gas wells could be capped and shut after 6-10 years of production.
Also, shale gas fields, just like shale oil fields, have only so many sweet spots and a finite number of drilling locations. So at some point in time (much sooner than later), these shale gas fields will peak and decline. And wouldn't you know it... that's exactly what's happening right now.Bill Powers (another top notch energy analyst), in his recent interview, "Give Up The Shale Gas Fantasy And Profit When The Bubble Bursts," had this to say about the peaking of several shale gas fields:
The facts are starting to
show that declines for the older shale plays such as the Barnett,
Haynesville, Fayetteville and Woodford are very serious.
This can be clearly seen in
the chart below showing the peak of gas production from the Barnett
Shale Field. Gas production increased steadily since 2000, peaking in
November 2011 at 6.3 Bcf/day (billion cubic feet per day). It fell 24%
to 4.8 Bcf/day by June 2013. This provides more evidence revealing just
how dire the future energy predicament will be for the United States.Very few Americans are aware that the production from these shale oil and gas fields will not continue to grow and last for several decades.
When we look at all the data presented here, it is clear to see that the shale energy industry in the United States is behaving more like a Ponzi scheme rather than a long-term viable economic energy system. Shale oil and gas companies have to spend more money each year to increase production or it will fall off a cliff.
While it is true that there is a great deal of supposed shale oil and gas resources in many countries around the globe, several of the analysts quoted in this report do not believe this short-term U.S. shale revolution can be replicated throughout the world. This is due to several factors, such as the lack of infrastructure, water, and technical expertise, and reduced property and mineral rights.
Once the U.S. peaks in shale oil and gas production in the next several years, there is no Plan B. Art Berman got it right when he made this remark about shale energy during his presentation: "Folks, this isn't a new Energy Revolution.... it's a Retirement Party."
The peak and decline of U.S. and global oil production will have a devastating impact on the world's economies and the majority of paper assets. While some individuals already see the writing on the wall, unfortunately the majority of investors have not yet connected the dots.
2015 Crash?
an article from outsider club
Over the past five years, we've enjoyed one of the longest, and most generous, bull markets in history.
But all good things must come to an end.
No bull market lasts forever, and this one has about run its course.
You don't have to take my word for it.
There's plenty of historical precedent to make the case for me...
You see, since 1928, the average duration of a bull market is 57 months. This one is now 68 months running. It's also returned 190%, compared to the average 165%.
Valuations have gotten so high that financial consultant Andrew Smithers believes we're in the third-biggest stock bubble in history.
Looking at key long-term measures, Smithers says U.S. stocks are now about 80% overvalued. And since 1802 (when data was first tracked), there have been only five times when stocks have been more than 50% overvalued: 1853, 1906, 1929, 1969, and 1999.
Each one of those years marked the peak of a massive, once-in-a-generation stock-market bubble. And only two of those bubbles (1929 and 1999) were bigger than today's.
Of course, historical precedent isn't the only headwind this market faces. Looking forward, anyone can see things are getting bad.
Mature economies, like Europe and Japan, are hardly growing at all.
The OECD predicts Eurozone growth will come in at 0.8% this year, and just 1.1% in 2015. Low inflation is a concern, as well, with prices expected to edge up just 0.6% next year.Worse, some countries in Europe have already seen deflation, forcing the ECB to rush to the rescue with stimulus efforts.
Things are even worse in Russia, which is lumbering under the weight of Western sanctions and cratering oil prices.
Russia's currency is at an all-time low vs. the dollar, and the country's own finance minister expects a 0.8% economic contraction next year.
Japan continues to languish in its decades-long malaise. And in China, the days of 10% and 11% growth are but a memory.
In fact, growth in China has been so sluggish that the country risks missing its 7.5% annual growth target year for the first time in 15 years.
And without China's sprawling manufacturing base, commodities-driven economies from Brazil to South Africa have lost the key export market that supported their growth for so long.
And the United States?
Well, we're doing better than most, but that's not saying much.
But that still doesn't mean we're out of the woods.
Going forward, the United States can pursue one of two paths...
If growth remains resilient, the Federal Reserve will continue to rein in monetary policy and follow through with a rate hike.
The other possibility is that the U.S. economy succombs to weak global growth, and tumbles back into a recession itself.
Either way, stocks go down.
A severe correction is inevitable, and as I said earlier, long overdue.
Analysts can dress it up however they want but the truth of the matter is that ever bull market in history can be broken into just three phases:
You saw what happened when the Dow plunged 1,100 points from September 19 to October 16. It was a blood bath.
Well guess what: Those weren't retail investors dumping their holdings, that was Wall Street.
And it's just the beginning.
Since that modest correction, stocks have bounced back, soaring to yet another record high.
That's totally unreasonable, and unsustainable, given the state of the global economy and the likelihood of a rate hike next year.
Even Federal Reserve Chairman Janet Yellen is calling it a bubble.
“Valuation metrics in some sectors do appear substantially stretched,” she said. “Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s.”
Translation: Stock prices are too high, and investors are too complacent.
Admitedly, that's a bit ironic considering it was the the Federal Reserve that opened Pandora's box by plying the markets with limitless, virtually free capital. But she's right. It's the end of the line.
The question is, then, what to do about it...
There's always a flight to safety when things go south, and precious metals benefit. If you don't own gold — either physically or through an ETF — now is a good time to buy some.
Gold prices have withered over the past year, mostly because investors — large and small — pulled their money out of precious metals and put it in stocks to chase the bull market.
That's a decision they'll come to regret if they don't take the proper precautions now. Soon, the trend will reverse. Stocks will plunge and everyone who's caught off guard will suddenly storm back into gold.
Another thing you might consider is adding an inverse ETF to your portfolio.
There are plenty to choose from:
Used appropriately, even a small allocation of your capital could more than make up for any losses you sustain in a market crash.
Get Ready for the 2015 Market Crash
Get Ready for the 2015 Market CrashOver the past five years, we've enjoyed one of the longest, and most generous, bull markets in history.
But all good things must come to an end.
No bull market lasts forever, and this one has about run its course.
You don't have to take my word for it.
There's plenty of historical precedent to make the case for me...
You see, since 1928, the average duration of a bull market is 57 months. This one is now 68 months running. It's also returned 190%, compared to the average 165%.
Valuations have gotten so high that financial consultant Andrew Smithers believes we're in the third-biggest stock bubble in history.
Looking at key long-term measures, Smithers says U.S. stocks are now about 80% overvalued. And since 1802 (when data was first tracked), there have been only five times when stocks have been more than 50% overvalued: 1853, 1906, 1929, 1969, and 1999.
Each one of those years marked the peak of a massive, once-in-a-generation stock-market bubble. And only two of those bubbles (1929 and 1999) were bigger than today's.
Of course, historical precedent isn't the only headwind this market faces. Looking forward, anyone can see things are getting bad.
Global Economy Stalling
The engines of the global economy are stalling, one by one.Mature economies, like Europe and Japan, are hardly growing at all.
The OECD predicts Eurozone growth will come in at 0.8% this year, and just 1.1% in 2015. Low inflation is a concern, as well, with prices expected to edge up just 0.6% next year.Worse, some countries in Europe have already seen deflation, forcing the ECB to rush to the rescue with stimulus efforts.
Things are even worse in Russia, which is lumbering under the weight of Western sanctions and cratering oil prices.
Russia's currency is at an all-time low vs. the dollar, and the country's own finance minister expects a 0.8% economic contraction next year.
Japan continues to languish in its decades-long malaise. And in China, the days of 10% and 11% growth are but a memory.
In fact, growth in China has been so sluggish that the country risks missing its 7.5% annual growth target year for the first time in 15 years.
And without China's sprawling manufacturing base, commodities-driven economies from Brazil to South Africa have lost the key export market that supported their growth for so long.
And the United States?
Well, we're doing better than most, but that's not saying much.
Damned If You Do...
The U.S. economy is on track to see 2.2% GDP growth this year, and optimistically, 3% growth in 2015.But that still doesn't mean we're out of the woods.
Going forward, the United States can pursue one of two paths...
If growth remains resilient, the Federal Reserve will continue to rein in monetary policy and follow through with a rate hike.
The other possibility is that the U.S. economy succombs to weak global growth, and tumbles back into a recession itself.
Either way, stocks go down.
A severe correction is inevitable, and as I said earlier, long overdue.
Analysts can dress it up however they want but the truth of the matter is that ever bull market in history can be broken into just three phases:
- The Accumulation Phase: This is the period at the end of a downtrend when informed investors — hedge funds, money managers, politicians, etc. — start snatching up shares on the cheap.
- The Public Participation Phase: As the market bottoms and begins its rebound, public fear and apprehension towards investing subsides, and retail investors retest the waters.
- The Excess Phase: Finally, momentum picks up and exuberance takes over. When that happens, a bear market is born, as the informed investors from Phase 1 bail out and leave retail investors holding the bag.
You saw what happened when the Dow plunged 1,100 points from September 19 to October 16. It was a blood bath.
Well guess what: Those weren't retail investors dumping their holdings, that was Wall Street.
And it's just the beginning.
Since that modest correction, stocks have bounced back, soaring to yet another record high.
That's totally unreasonable, and unsustainable, given the state of the global economy and the likelihood of a rate hike next year.
Even Federal Reserve Chairman Janet Yellen is calling it a bubble.
“Valuation metrics in some sectors do appear substantially stretched,” she said. “Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s.”
Translation: Stock prices are too high, and investors are too complacent.
Admitedly, that's a bit ironic considering it was the the Federal Reserve that opened Pandora's box by plying the markets with limitless, virtually free capital. But she's right. It's the end of the line.
The question is, then, what to do about it...
When All Else Fails...
One option is to buy gold.There's always a flight to safety when things go south, and precious metals benefit. If you don't own gold — either physically or through an ETF — now is a good time to buy some.
Gold prices have withered over the past year, mostly because investors — large and small — pulled their money out of precious metals and put it in stocks to chase the bull market.
That's a decision they'll come to regret if they don't take the proper precautions now. Soon, the trend will reverse. Stocks will plunge and everyone who's caught off guard will suddenly storm back into gold.
Another thing you might consider is adding an inverse ETF to your portfolio.
There are plenty to choose from:
- Rydex Inverse S&P 500 Strategy Fund (RYURX): One of the more traditional bear funds, RYURX delivers a return opposite to what the S&P 500 does. So if the S&P 500 goes down 5%, it goes up 5%.
- ProShares UltraShort S&P 500 (SDS): This fund is leveraged to give you twice the return of any drop in the S&P 500. For example, if the S&P 500 loses 5%, this fund goes up 10%. Be warned though, if the market goes up 5% this fund goes down 10%.
- ProShares UltraShort Russell 2000 (SRTY): This is a more aggressive play. Small caps are more vulnerable to sell-offs, and this fund targets the sector by delivering a return that is three times larger than any decline in the Russell 2000 index.
Used appropriately, even a small allocation of your capital could more than make up for any losses you sustain in a market crash.
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