After a whirlwind of a weekend, markets opened this morning to a double dose of uncertainty – and an immediate halt to trading.
First, oil prices dropped as much as 30% last night as negotiations over how to prop them up between Saudi Arabia and Russia collapsed.
Saudi Arabia responded in a panic by opening the spigots, cutting prices, and ramping up production. They hope to punish Russia and drive U.S. Shale oil producers out of business with this unprecedented gambit.
That’s the first Reality Gap of the week: between what the Kingdom thinks will happen, and what will actually happen.
In the short-term, oil prices have fallen by historic proportions, and Saudi Arabia’s competitors will suffer. Chief among these are Russia and the U.S. shale oil industry. As I said, that’s the goal the Kingdom has in mind.
But when they tried depressing oil prices to edge out the competition back in 2015-16, it didn’t work. The U.S. oil industry not only survived but grew, while Saudi Arabia had to back down with egg on their face and billions of dollars in deficit. The same will happen again. There could be some unexpected consequences here – and I’ll write more about that here in Straight-Up Profits – so stay tuned for more on this.
[EXCLUSIVE INTERVIEW] Learn straight from the founder who took a company to $189 billion – and paid early investors oodles of cash along the way.
In the meantime, the price dumping comes at one of the worst possible times for the market and is adding a huge dose of uncertainty to an already panicked market.
The second reality gap for the week is between the reassurances that Western governments (especially the U.S. government) keep giving about coronavirus, and what traders are seeing on the ground.
Over the weekend, Italy announced a quarantine of 16 million people. That’s a quarter of the country’s population, in Italy’s the richest, most industrially developed northern regions. France, Spain, and Germany all now have over 1,000 confirmed cases and the rest of Western Europe reported spikes in cases as well.
The same is coming to the U.S. soon. The number of infections here are low so far because we have tested so few people. Once testing really takes off this week, we’ll see big numbers starting to hit. Traders are anticipating that and are bearish as a result.
This week, U.S. case numbers will be rising, but also be on the lookout for the world’s central banks to act in unison to support the markets.
But don’t try to pick bottoms here. The largest up days for the markets always happen during crises. But they usually don’t mark bottoms, and they are very unpredictable.
An old British bankers’ saying is apt here: “Sometimes the return of your capital is more important than the return on your capital.” In other words, keep your powder dry make sure you have some money left to invest once coronavirus fears start to wind down.
That’s where the real money will be made.
Great trading and God bless you,
D.R. Barton, Jr.