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Eric Sprott Was Right —Oil Slump Says ‘No’ to Recovery Story

 -- Published: Friday, 27 February 2015 | Print  | Disqus 

By Henry Bonner

Gas prices are some of the highest in the country in San Diego, California, and it still cost me only $2.96 a gallon to fill up my tank last week.

There’s an excess of oil supplies, according to analysts. You can see from the chart below that global oil production has been rising steadily over the last three years.

Global Crude Production

In our new report, we make the case that the oil decline is not merely a supply issue.

Oil is cheap, but so are copper, uranium, iron ore – all the materials that are used in a growing economy. Increased production of goods and services tends to stimulate consumption of these raw materials.

This recovery isn’t causing an uptick in demand for these metals and energy sources. Hence, copper is near a four-and-a-half year low of $2.661 per pound. Uranium is at $39 per pound, down from $652 per pound in 2011. Iron ore for delivery in 2015 trades below $60 per tonne, down from over $180 per tonne in 2011.3

Instead, we are seeing an uptick in the demand for US stocks, bonds, real-estate, and other assets whose values have been rising.

US stocks have soared by around 100% since early 2011. Corporate buybacks and debt issuances have surged too. US corporations are piling on new debt and buying back their shares. In 2014, S&P 500 companies are estimated to have spent 95% of profits on buy-backs and investor payouts.4

As you can see, stock buybacks have been on the rise since the crisis.

Buybacks S &p 500

These buybacks are in part fueled by historically low interest rates, allowing companies to borrow cheaply. Around $1.7 trillion in buybacks occurred from 2011 to 2014.5 New corporate debt has increased by around $1.4 trillion during that time – as you can see in the chart below.6

Corporate Debt

Sustained low interest rates have also boosted the bond market and helped the housing market where the availability of financing for purchases is crucial.

US stocks, bonds, and other assets are getting a lift from low interest rates… We have even seen some jobs growth in the last year. This has fueled an optimistic ‘recovery’ story.

A prevailing narrative is that the US economy is recovering, while other major consumers of raw materials like China and Europe are not. Thus commodities are cheap despite a recovery in the US.

Proponents of this thesis look at higher assets prices brought on by ultra-low interest rates as signs of economic growth. Yet the low interest rates that are driving these price increases are symptoms of a tepid economy. Debt is cheap because investors expect weak inflation, or even deflation, and are rushing to safety.

Eric Sprott wrote in his September note:

While most have been conveniently blaming the tepid first quarter -2.9% GDP growth figure on the weather, we believe it is just another symptom of a much deeper malaise. […] The U.S. economy has been on life support, graciously provided by Central Planners.

[…] The bottom 40% of households still rely heavily on government assistance, have had stagnant incomes and have been faced with increasing inflation for ‘non-discretionary’ goods that constitute a very large share of their incomes.

There clearly is no recovery…

Cheaper oil prices don’t just come ‘out of the blue.’ Other commodities used for raw materials, construction, and economic growth, have been languishing too. And real median incomes remain stagnant since the Great Recession.

These are all signs that the recovery we are seeing is mainly asset inflation brought on by cheap debt, not economic growth.

You can download our full analysis in our new report ‘Oil and Gold: Where Do We Go from Here?’ Click here.

1, 2, 3 Bloomberg
4 Bloomberg online: S&P 500 Companies Spend 95% of Profits on Buybacks, Payouts. October 06, 2014
5 S&P 500 Dow Jones Indices
6 Board of Governors of the Federal Reserve System (US)


This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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 -- Published: Friday, 27 February 2015 | E-Mail  | Print  | Source:

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