Thinking Out Loud: Oil & Yields & Dollar
In support of my thesis that oil price falls even if US yields don't as USD devalues.
Oil & Yields & Dollar - Uncorrelated Assets Under Fiscal Dominance (Part 1)
This is taken in part from my CLUB/EDGE client post last Monday:
INTERMARKET ANALYSIS REVIEW: Peak Oil & Semis & Tech As Gold Digests & Value Resets for 2025
Before Trump, and even after Trump won the election, I have talked of how I see crude oil rolling over next year - and potentially taking yields lower with it.
Geoffrey warns that although oil price may fall, it does not mean yields will be pulled lower with it. Here's his thinking summarized:
In monetary dominance, both Oil and Yields come down from the same source. In fiscal dominance, when there is too much supply on the Treasury side while there is less demand for USD and UST - BECAUSE of less demand for petrodollar and oil - Oil price can fall AS yields rise.
Further, because of the amount of external debt by the US, we can't do yield curve control (YCC) like Japan. We must deflate that debt away by devaluing the US dollar.
So.... he DOES agree price of oil should fall, but with USD expected to fall relative to other FX, it may not be as easy to trade.
And since timing matters, my view that 10Y yields will fall into 3.2%, does not negate that they will rise back to 5% area soon after! Again, you have all the bond kings short longer-duration bonds for all the reasons Geoffrey has explained over the past year: Fiscal dominance is not deflationary.
WTIC chart is still a big short next few years as price broke down inside this monthly trendline and is tap, tap, tapping on my $65.65 monthly support - as RSI rolls lower (top panel) and MACD breaks below "0" (lower panel).
VIP Questions:
Assuming lower oil prices, will this be simulative to US consumers and the economy overall and viewed as bullish?
Or will falling oil prices be viewed as deflationary AND drive down margins and production as oil companies meet falling demand?
And will this reduction in both profits and activity cause employment shedding, similar to the oil recession of 2014-2016?
If the latter, it would be interpreted as economic slow-down that pulls interest rates lower.
Otherwise, falling oil price and rising yields is going to confuse Wall Street, because "Bonds down and Oil down" is uncorrelated in Monetary Dominance and correlated during Fiscal Dominance even as USD loses value!
And as there is less demand globally for oil with China pushing cheap EVs onto consumers, which relieves them in part on their dependency on US oil/dollar/bonds, Oil price CAN fall AS yields rise. Just something to keep in mind.