NEW YORK -- We have been extremely and relentlessly bullish on the U.S. dollar since Q1 of 2008. And we have been extremely and relentlessly bearish on the commodity sector since June of 2008. These two markets are flip sides of the same coin, and that coin is deflation. “OPEC” and “market share” are merely the latest smoke-screen buzz words that allow central banks to avoid uttering the dreaded word “deflation.”
The banks can instead try and present collapsing commodity markets as a boon to the global economy. However, collapsing commodity prices have never been a boon to the economy. For example, the commodity markets peaked in 1920 at 112.03 basis point on the CRB Index. That peak marked the start of a major long-term collapse. That collapse did not bottom out until 29.30 in 1933. Of course, no one looks back on this powerful surge of deflation, a 74% drop in commodity prices, and points to it as a boon for the global economy.
The next step in this deflationary saga will likely be the banks turning off the credit spigots to U.S. shale crude-oil producers. Some of these eternally bullish producers may still be thinking that their breakeven is a certain price of crude oil. They are about to find out that their true breakeven is the point at which they can no longer borrow, or even roll their existing debt load.
Where does all this leave gasoline prices? Trapped, for now, in a global deflationary vortex. My prime candidate for long-term support for this first quarter is the 1.0680 to 1.0025 range. However, for gasoline to hold and rebound from any level will likely require a correction lower in the U.S. dollar.
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