This is how it happens -- this is how it always happens -- out of the blue, with no warning and with no expectation of disaster. No matter how often I see it, I still can't believe it.
It's not as if we didn't know that China's growth numbers were a bunch of horse hockey. Heck, we've known it for two years with Jim Chanos of Kynikos Associates going blue in the face telling us how bad things are while his fund was murdered in the Chinese stock run-up. We knew Chanos was right, but what do you do? Stay short for two years?
We knew the Fed would have to start normalizing rates some time. I mean, how long can you run an economy on zero interest rates before you need to pull back the punch bowl at least a little? But Fed talk had taken up almost every moment of financial television for the last two years as well and still, with all of that parsing, no one saw this coming -- no one.
And, of course, there's the commodity bundle, including oil. Deflation in the entire commodity sphere, particularly copper, iron ore and zinc -- the three industrial metals -- and in grains was almost worse than we've seen in oil and natural gas. Was it possible for this to be the first time in modern history that the entire commodity complex could be devalued so quickly without a concurrent destruction in risk assets? For the last two years, it seemed like it could be so.
That's how black swan events operate: always as a surprise. They are reliant upon being a surprise, and a nearly 2000-point rout in the Dow in just a few days of trading is a full-fledged black swan event, no doubt about it. The macro is known now. China is bad, as we all knew, but ignored. The Fed will have to raise rates, and the commodity bundle was telling a story that stocks shrugged off for a year.
But what now?
I circle back to oil, understanding that its story is being entirely swamped by China and the Fed. While the disaster in stocks has been monumental, the commodity collapse has been in full bloom for more than a year -- more than three years if you look at copper and the other industrial metals.
But for oil, signs abound that the pain from the producers is about to reach its straw on the camel's back, the tipping point where they simply can't take it anymore. Just this week, the auction of new U.S. leases in the Gulf of Mexico for offshore drilling attracted the smallest number of bids since 1986. That's nearly 30 years. After a year of horrible refinancings and shoddy secondaries, shale players are out of financial tricks to continue to pull $65 oil out of the ground when prices are at $40. Nearly a third of global production is on the brink of signing off.
Forget about demand. The supply side is going to be slashed and if you look closely, it's already begun.
As for stocks, I cannot resist. I am out a lot of money here, but I did not buy oil stocks when oil was dropping below $85 in 2014 and resisted the midterm rally to $62 a barrel, as shale players, offshore specialists and natural gas producers were being slammed.
I have EOG Resources (EOG) at $75.50, Chesapeake (CHK) at $7.65 and SeaDrill (SDRL) at $9. This morning, they're all going to be a lot lower than that.
And I'm going to be a buyer because I've seen this before. It's always a surprise, and it always looks like the wrong thing to do, but these full-scale panics are made for those with some courage and some capital left.
I have both. But you have to decide for yourself.