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The decline in house prices that began in 2006 wasn't the cause of the
2007-2009 economic bust. The cause was widespread mal-investment resulting
from monetary inflation and the Fed's interest-rate manipulation. However,
the 2006 reversal in house prices set off a series of falling economic
dominoes due to the fact that the housing market was where a
disproportionately large amount of the mal-investment and associated debt
happened to be. The reason for mentioning this is that the 2014 downward
price reversal in the oil market might have played the same role as the 2006
downward reversal in the housing market, because this time around a
disproportionately large amount of the mal-investment and associated debt
happened to be linked directly or indirectly to the booming oil industry.
A lot of high-yield debt was linked both directly and indirectly to the
booming US oil industry, which is why proxies for the US high-yield bond
market reversed downward at almost the same time as the oil price in
mid-2014. With ETFs such as JNK (the Barclays High Yield Bond Fund) and HYG
(the iShares High Yield Bond Fund) having made new 6-year daily-closing lows
on Monday 14th December there is little doubt that the US high-yield
corporate bond market is immersed in a cyclical bearish trend. In effect, the
falling of the oil domino knocked down the high-yield bond-market domino.
Another of the dominoes to fall in reaction to the oil reversal is the
railroad industry. The railroad business boomed due to a large increase in
the demand for rail cars to carry oil from the oil-fields and supplies to the
oil-fields. In this case the reaction was delayed, as it wasn't until late
last year that investors began to connect the dots. Last week the Dow Jones
US Railroad Index (DJUSRR) made a new 2-year low and is clearly immersed in a
cyclical bear market.
The following chart provides a visual representation of the falling
dominoes discussed above. Notice that HYG (the blue line), an ETF proxy for
high-yield bonds, began to fall almost immediately after the oil price (the
black line) turned down, whereas DJUSRR (the green line) trended upward for
an additional 5 months before toppling over.
 
There's a high risk that economic dominoes will continue to fall until
there are none left standing, but be warned that it could be a very drawn-out
process. During the preceding cycle there was a 2-year gap from the reversal
in the housing market to a general capitulation, and this time around the
monetary backdrop is more bullish.
http://tsi-blog.com/
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