Money and Markets: Investing Insights

Shocking Forecasts Coming True

Martin D. Weiss, Ph.D. | Monday, January 25, 2016 at 7:30 am

Hah! A lot of so-called “experts” on Wall Street, trying to divine the next bottom for a barrel of oil, now say it will be $25, $20 or even as low as $15.
What’s ironic is that, among them, are some of the very same individuals who, near the peak of the oil market just 18 months ago, were telling you to expect ten times more — $150, $200 or even $250 per barrel.
I can understand how they might want to make mid-course corrections in their forecasts from time to time. But the unfortunate reality is that their voices seem to surge and sink with the same high-pitched volume and volatility as the market itself.
Ditto for their forecasts on commodities, China, emerging markets, the U.S. dollar and, most recently, the U.S. stock market. To be expected, I guess. But not exactly helpful for investors like you.
Wait a minute …
Do you think that I’m now going to follow up with a compliment for our own Weiss Research forecasters?
Do you suspect I’m going to use this opportunity to remind you how they predicted the oil market crash and its consequences with remarkable discipline and precision?
You’re darn right I am. For example …

Before oil peaked in 2014, Weiss Research’s Larry Edelson mapped out exactly how oil prices would plunge to where they are today. So last year, I interviewed him extensively about his forecasts on all markets. (Click here for that transcript and here for the follow-up.)
Before nearly anyone was talking about a long-term surge in the U.S. dollar, Weiss Research’s new forecasting duo — Boris Schlossberg and Kathy Lien — were lone wolfs betting on that all-important megatrend. I interviewed them last week, and I found the experience enlightening. (Click here for that transcript.)
Similarly, before the recent rout in U.S. markets, Weiss Research’s Mike Larson warned repeatedly of the dangers — always offering proof after proof for die-hard disbelievers. Now, with those events unfolding just as he said they would, I’ve jumped on the occasion to undertake this third memorable interview …
Global Shock Waves
In last week’s interview, Boris and Kathy told you about the next major earthquake and why China was at the epicenter. Now, the first words from Mike take that forecast to the next level …
Mike Larson: The global shock waves are now spreading outward in clearly definable concentric circles.
Martin Weiss: Please name them and tell us what’s next for each …
Mike: Boris and Kathy nailed it. It starts with China’s slowdown, which is quickly morphing into a deflationary collapse for the world’s second largest economy.
Oil is the next concentric circle. Last Friday, even after a rally, it was down almost $80 per barrel from its 2014 peak.
Martin: Most investors are tired of hearing that.
Mike:  Perhaps. But what they may not know is how broad and massive the impacts are bound to be, assuming …
Martin: … assuming oil continues to plunge?
Mike: No, assuming nothing about the future price of oil. Even if oil bottoms right here and now, massive consequences are already baked into the markets and economies of the world.
Martin: Sure. In the oil exploration and production sector, it seems investors already gave up months ago.
Mike: That’s an understatement. Last year, EPX, the index of oil companies plunged 42%, compared with a virtually flat S&P 500 Index.
Just recently, SandRidge Energy Inc., which was a once high-flying Oklahoma-based shale company, was delisted by the New York Stock Exchange. I think it was selling under 20 cents a share.

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Martin: Same for other kinds of energy.
Mike: Absolutely. Coal in the U.S., which was already a dying industry, has been absolutely decimated by the energy plunge. Shares in once-proud-and-famous coal mining giants like Peabody Energy and Arch Coal are now selling for pennies or dimes on the dollar — or going broke.
The natural gas sector is in ruins — LNG futures down 28%; major producers like Cheniere Energy and ConocoPhillips, down 58% and 38.7%, respectively. 
Alternative energy — solar, wind, even nuclear — has been clobbered. Who in their right mind is going to invest in all the modern technology and infrastructure you need to get those going when old-fashioned fossil fuels are now so, SO much cheaper.
Martin: But the impacts aren’t limited to energy producers, are they?
Mike: Not by a long shot. The shock waves are also slamming into companies that specialize in storage and transportation. Look at railroads, for example — devastated because oil and coal cargos are down so dramatically. Ditto for trucking companies.

Martin: I notice the Dow Transports just dropped to the lowest since the fall of 2013.
Mike: Exactly what I’m talking about.
Martin: You’ve also been warning about the pile up of debt in the oil world and the looming disaster in junk bonds.
Mike: $353 billion in debt as of December of last year. Just in oil exploration and production companies in the U.S. and Canada.
Martin: Right. And now the junk bonds have really been through the paper shredder.
Mike: Absolutely. One of the most reliable bellwethers of junk bonds — the ETF with the symbol JNK — is now down 32.7% from its 2007 peak, and apparently headed for a rendezvous with its panic low in the depth of the 2008-09 debt crisis.

Martin: You used to be pretty much the only one warning about a disaster in the junk bond market.
Mike: For a while, yes. But not anymore. For example, Bill Costello, energy analyst at Westwood Holdings Group Inc. says this year is going to be much worse for companies with weak balance sheets. He sees restructuring on the way for smaller producers like Penn Virginia, Midstates Petroleum Co., Ultra Petroleum, GoodRich Petroleum and Resolute Energy.
I agree. They could go the way of Swift Energy, which stopped making some debt payments in December and then filed for Chapter 11 on the last day of the year. But I would take this conversation far beyond small companies. They’re just a sneak preview of much bigger dominos likely to fall in 2016.
Martin: And you’ve been warning that the debt mess is not going to be contained just to the energy patch. It’s also going to spread out from there. Is that happening?
Mike: Yes. I already mentioned transports. But the energy collapse is now also impacting the demand for steel used in oil and gas pipelines or for steel to build and maintain oil and gas wells.
Martin: Energy isn’t the only reason steel is collapsing, is it?
Mike: No. Steel is also collapsing because of the same reasons oil is falling — China, the plunge in other emerging markets, falling global demand.
And here’s the key: All these deflationary forces are feeding on each other. Not just in steel, but also in iron ore, tin, aluminum, copper and more … plus grains, meats and other markets.
Martin: Can we bring this back to energy stocks? Stick to the top names for now.
Mike: Sure. Look at Exxon Mobil, down 13.6% from its 2014 peak; Chevron, down 28.3%, and Hess off 59.3%. Do you realize Hess just traded down to the same level where it hit rock bottom back in 2009? Scary, eh?
Martin: Only if you’re not prepared.
Mike: Agreed. Also look at the huge damage that’s been done to Halliburton, down 26.8% to $29.29 per share, Schlumberger (down 23.4% to $61.45 per share) or Chesapeake, down 82%, a possible candidate for bankruptcy.

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What Next?
Martin: Mike, so far you’ve told us what’s happened. But the payoff for our readers is guidance on what’s going to happen next.
Mike: Whether oil prices bottom now, go lower or rally, what we’ve got here is plain as day. It’s global Deflation with a capital “D,” just like Larry said it would be before it all started.
Martin: Tell our readers exactly what that means to investors.
Mike: It means a dangerous cycle of declining commodity prices, disastrous corporate revenues, disappointing profits and, ultimately, a rash of debt defaults.
It means near-depression in energy producing countries (like Nigeria, Russia, Kazakhstan and even Saudi Arabia) … recession in giant commodity countries (Brazil, Canada, Australia) … and slumps in economies not typically associated with commodities (such as the United States, the European Union and where it all started, China).
Plus, as we discussed earlier, this isn’t just an energy story — or even a commodity story. More and more sectors of the stock market are weakening because the economic pain and credit market problems are spreading. That’s causing losses to mount in all kinds of sectors: autos, financials, media, real estate, technology, you name it!
Martin: But it doesn’t mean disappearing wealth-building opportunities.
Mike: Quite to the contrary. You can make great fortunes on the way down with ETFs or options that are explicitly designed for that purpose. And you can make even greater fortunes by buying into massive weakness. Even if you don’t pick the exact bottom, as long as you have plenty of cash on the sidelines, the more things go down, the more your cash is worth in terms of the number of shares it can buy.
You can also make fortunes in a giant healthy marketplace that trades instruments with no correlation to stocks and bonds — foreign currencies. In fact, deflation is great for currency investors because it helps drive the U.S. dollar on a smooth, steady ride straight into the stratosphere. And on the day the tides turn back to inflation, currency investors can anticipate an even bigger profit bonanza. 
Martin: Thanks for ending on a very positive note.
Mike: Thank you, Martin.
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Dr. Weiss founded Weiss Research in 1971 and has dedicated the past 40 years to helping millions of average investors find truly safe havens and investments. He is president of Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. And he is the chairman of the Sound Dollar Committee, originally founded by his father in 1959 to help President Dwight D. Eisenhower balance the federal budget. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recesssion and Depression.

The investment strategy and opinions expressed in this article are those of the author and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.