Oil analysts claim the Tillerson ouster is bullish for oil.

Joseph McMonigle writing for HedgEye says Tillerson’s Departure Signals End of Iran Nuclear Deal & Higher Oil Prices.

  • Trump’s decision to replace Tillerson surely signals the end of the Iran nuclear deal. While a reluctant Trump issued another waiver of Iran oil sanctions in January, he warned that it was the last waiver unless the agreement is changed to address his concerns.
  • Re-imposing US oil sanctions on Iran would put as much as one million barrels a day of Iranian crude exports at risk of being removed from global markets. Such a move would inject significant geopolitical instability in oil markets and likely send oil prices higher.
  • Trump’s new Secretary of State-nominee Mike Pompeo is aligned with Trump on the Iran policy. He had been a leading opponent of the Iran nuclear deal when he was a Member of Congress.

I strongly disagree for political reasons and economic reasons. Throw in sentiment for good measure.

Political: Trump is a Lone Wolf

Unless the ECB also puts sanctions on Iran, Trump will be an ineffective lone wolf.

There is no reason to believe the ECB will go along with Trump. The ECB despises Trump.

On July 30, 2017, the Financial Tribune announced a Six-Fold Rise in EU Oil Imports From Iran.

Is that going to change because of Trump? Are exports to China going to change because of Trump?

No, to both.

On January 16, 2018, Reuters reported India's imports of Iran oil in Dec scheduled to rise to most since March.

Will exports to India change because of Trump?

Sentiment

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Sentiment is not a timing indicator, but that is about as lopsided as things get.

Price - West Texas Intermediate Futures

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The market does not agree that the removal of Tillerson is bullish and neither do I.

Economic Reasons

Retail sales have been pathetic, Down Three Consecutive Months.

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Talk about jobs all you want, but consumers are not spending. Economists are shocked. I'm not.

GDP Estimates

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GDP estimates are falling like a rock. Once again, there's no surprise here. 4th quarter spending was goosed by hurricanes and this is payback time as predicted.

Home Sales

Think about those reports. It should take about 1 second.

When consumers are not buying homes, they are also not buying new carpets, new appliances, new furniture, or new kitchen cabinets.

Auto Sales

Inflation?

Where's Inflation? Inflation is in the Rear View Mirror, that's where.

Distressed debt is at a 7-year high, up 11.5% in the fourth quarter of 2017.

The Financial Times notes "More Americans are also falling behind on their mortgages, for which problematic debt levels rose 5.2 percent over the same period to $56.7 billion."

Deflationary Debt Trap Setup

These numbers are hugely deflationary. When credit expands there is inflation. When credit contracts (think defaults, bankruptcies, mortgage walk-away events), debt deflation occurs.

Here's my definition of inflation: An increase in money supply and credit, with credit marked to market.

Deflation is the opposite: A decrease in money supply and credit, with credit marked to market.

You may or may not like my definitions, but they are how the real world works. Banks keep lending, and lending on riskier and riskier assets to support riskier and riskier projects, until problems hit.

Looking Ahead

  • Credit card delinquencies are priced as if they will be paid back. They won't.
  • As soon as recession hits, defaults and charge-offs will mount. In turn, this will reduce the amounts banks will be willing to lend.
  • Subprime corporations who had been borrowing money quarter after quarter will find they are priced out of the market, unable to roll over their debt.

When asset prices decline, banks cannot take more risk. Lending declines.

In a fiat credit-based global setup, this is how the real world works.

Perhaps we get consumer inflation for a quarter or two, but inflation is largely if not entirely in the rear view mirror, primarily having impacted asset prices, not consumer prices.

What economists expect to happen, already has. They don't see it because they do not understand what inflation really is.

Still like crude? With the economy clearly slowing and sentiment massively lopsided? Why?

I will add one possibility for the long side: We actually attack Iran, taking out their refineries. I do not see this as likely.

Mike "Mish" Shedlock

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