This Could Get Tricky

The next three weeks could feature some of the trickiest financial crosscurrents we seen in 40 years. As you can see by the chart above, the amount of money pouring into the oil futures market has been climbing. In a classic supply demand curve the demand for oil contacts is driving price higher, especially given the limit on supply and all the other risk premiums for War, revolution, sabotage, etc. This is especially painful to the U.S. as the dollar is falling on the same commodity trader dymanics. We get twice the pain as the Euros.

Ben Bernanke knows the trading desks are gaming these markets and so yesterday he threatened to intervene on behalf of a strong dollar, while indicating the Fed would pause in Interest cuts.  This morning some of the traders started to fold. I’ve been warning that oil will fall and been scorned by some of my Texas correspondents. I sure hope they don’t own any three month forward oil contract at $130 bucks.

The dollar will strengthen and oil will fall to $100. But listen, this is not a long term trend. I still believe in Peak Oil. That’s why I say there are crosscurrents. Because if you had a long term time horizon (4 years) you would be long oil and short the dollar. Problem is, these traders have a four week time horizon, so Ben Bernanke can f**k with their heads.

The resident Cassandra, Prof. Nouriel Roubini thinks this really could get ugly soon, contrary to the conventional wisdom that the storm has blown through town.

No wonder that now heads just started to roll at the top of Wachovia and WaMu; that Lehman – even with the protection of the Fed liquidity blanket – is in trouble again; that Countrywide is on the verge of bankruptcy once BofA pulls out of a loser acquisition of the biggest and most insolvent mortgage lender; that the troubles among mortgage lenders are now spreading to the UK where the housing bubble was as big – if not bigger – than in the US; that S&P has finally downgraded major financial institutions; and now that more financial trouble lurks ahead for major US banks and smaller US banks (small banks that will go into bankruptcy by the hundreds as the housing recession deepens, home prices collapse and the economic recession deepens and persist longer than expected by the market consensus). So after a brief period of complacency – if not delusional optimism that the worst was behind us – a painful reality check is setting in. Fed Funds easing and new liquidity facilities (TAF, TSLF, PDCF, Swap lines) of the Fed cannot resolve insolvency and credit problems that go well beyond illiquidity.

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0 Responses to This Could Get Tricky

  1. Morgan Warstler says:

    Raise short term interest rates to:

    1. stave off inflation.
    2. force the new government to stop deficit spending.

    Jon, don’t daydream that we won’t soon be hearing that deficit spending is servely impacting our economy.

  2. Jon Taplin says:

    Morgan- Guess what. We raise short term interest rates and T-Bills become even more attractive. Look at the monthly auction figures. The demand for new treasuries is always 200% of what is being auctioned. You just don’t realize the power of T-Bills as a safe haven in an unsafe world that I just described above.

  3. Morgan Warstler says:

    Who gives a rat’s ass about the demand for t-bills? On the demand side, it’s nice people still believe in them, and want to buy them, but thats about it.

    Who “wants” the government selling more t-bills?

    Banks that had to have liquidity, so the treasury is selling, but now the Fed ain’t buying.
    The siren call is going to be for them to cut the deficit, so they need to sell less t-bills. The word has come out from on high, protect the dollar, stave off inflation. That means cut deficit and raise short term interest rates. That means no new spending and no new social programs.

  4. Brian says:

    If oil does ‘fall’ to $100 a barrel, then gas will stay around $4.00 a gallon because refineries will want to recoup the loses incurred so far. The slight decrease in demand will have little impact on long term gas prices. I don’t see any way that gas will ever go below $3.00 a gallon again. However, less demand does mean less fuel taxes which means less road and bridge maintenance which is big trouble for the economy. There are already major problems with the crumbling infrastructure in this country and that will require trillions of dollars that will require deficit spending. Mobility equals prosperity and that’s something the public and government have forgotten.

    Raising interest rates will cool inflation in terms of imports, minus the commodity speculation, but since employers are in no hurry to raise wages (counting on layoffs and squeezing more productivity) and consumers are cutting back on spending, it’s likely that inflation will not be a major concern the rest of the year. The downward press of the housing market is suppressing all other retail markets and the financial markets are whistling in the dark if they believe the worst is over. Personal credit is tapped out and personal deficit spending dwarfs the federal shortfalls.

    Deficit spending by the Federal government keeps the states from raising taxes. If the states are having to slash spending due to revenue shortfalls right now, what would happen if the Feds cut back on social mandates? Almost all the Federal budget is Medicare, Medicaid, Social Security and the military now and within several decades with be the entire Federal budget. The few state funding medical plans are broke and likely to be eliminated. Deficit spending goes hand in hand with tax cuts and unless everyone decides to give up all forms of entitlements and subsidies, you need to make a choice. I don’t think Google, Microsoft, Wall Mart or Exxon/Mobil is very interested in taking over the government’s social obligations anytime soon.

  5. Jon Taplin says:

    I’ve got to go with Brian’s analysis on this one. Spot on.

  6. Ken Ballweg says:

    It’s so not limited to the housing bubble or gas prices. The US has been on an unprecedented borrowing spree on all levels. All of the growth of the last two decades have been propped up by consumer and industrial borrowing on all levels, not just the home markets. We wage a war and fund misguided bailouts for the alleged free market GO’lBs without a way to pay for it except by deferring the cost to the future, and every day runs up compounding interest. We are so over extended that only a major breakthrough in energy technology that could start another bubble can stave off the inevitable.

    I fear we are headed for a depression at worst, a prolonged recession of great depth and magnitude at best. You can’t borrow away debt and expect to call that growth forever. When the mass market can no longer buy consumer products, all markets collapse. When the wealthy accumulate too much wealth, it locks it up in non-productive ways, especially when too many are not investing in home grown slow and low growth industries, but are out speculating on ways to maximize profits without regard to infrastructure (insert definition of Ponzi scheme here), you grow an illusion of growth. Excess borrowing is the steroid scandal of the market place. The price of unregulated markets is Ponzi schemes (shut up Morgan!! Your unregulated markets are as bad as over regulated markets, and all your modified Libertarian pontificating isn’t any less delusional than the BushCo’s version of endless endless growth by giving money away).

    Trouble is that the normal way out is to have a bashing good war to make people accept sacrifice and make increased GDP production at low wages a patriotic duty. We already have our jolly good war set up on a no-sacrifice basis so that is going to be hard to come by.

    Universal health care???? It’s going to come down to freakin’ survival, and the class wars are going to require the rich to bring their armies home to protect them from home grown terrorists…. So, buy a small appliance repair shop, a bar specializing in cheap alcohol, or an apple orchard, reduce expectations, and hunker down for a long and ugly ride.

    Cranky Cassandra signing off…..

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  8. Morgan Warstler says:

    Yeah Jon, of course, no response real response – again.

  9. Jon Taplin says:

    Look Morgan, if either Ken Ballweg or Nouriel Roubini is right we could have an economic slump that looks a lot more like 1932 than 1990. And if that’s true then the only solution is Keynesian fiscal stimulus of spending government funds rebuilding our crumbling infrastructure (digital and physical) and tax cuts (as you suggest) to spur the move to alt. fuels (no sales tax on Hybrids or solar roofs).

  10. Morgan Warstler says:

    Jon, the die is cast. Read the tea leaves. INFLATION is the problem now.

    And that means less debt for the government and higher short term interest rates for businesses. We were here exactly in 1992. The money has all been spent.

    Look, the doesn’t mean Obama and McCain cant do amazing things – its just that innovation has to happen inside $MAX – and that’s a good thing – creativity happens when you work with what you got, not a blank check – see Internet boom.

  11. Zhirem says:



    Please explain: “…creativity happens when you work with what you got, not a blank check – see Internet boom.”

    What is unlike a blank check when investors were throwing billions at teenagers with a good idea and no monetization scheme? Some folks (many in fact) were going absolutely nutso with blank checks during the boom. See AOL and Time/Warner merger, etc.

    See: Dot.bomb or Dot.gun or Dot.gone

    That said, I do agree with your point, of making due with what you have to work with, but your supporting statement I think was laughable on it’s face.

    – Zhirem

  12. Morgan Warstler says:

    I meant Zhirem that broadband took off AFTER the boom, when money wasn’t being thrown at it. I should have been more specific.

  13. According to the government there is no inflation after you strip out food and energy and include home prices. Gas up plus food up minus lower house prices equals no inflation.

    Nothing to see here, move it along and go back to having double lattes with sprinkles. Everything is under control. Trust us.

  14. Jon Taplin says:

    Morgan- I’m pretty knowledgeable on the Broadband issue. You are wrong. The reason price /bit plummeted was because of the overbuilding of backbone for 1998-2002. It was falling faster than Moores Law curves.

  15. Morgan Warstler says:

    Yeah Jon, I’m pretty knowledgable on the broadband issue too. LOL.

    The reason consumers adopted broadband after the rich media market died in 2000, and the online advertising market died in 2001, (and pop ups took off) was because of Kazaa. The real take off occurred 2002-2004, when web tech was still shell shocked. With an intimate understanding of that specific architecture, you’d understand the cable guys loved it – no matter what they said publicly.

    I believe you and I met the same week that I sat at BDE and watched Morpheus get turned off. The industry was in shambles and Kazaa was booming. There was nothing left to do with a fat pipe back then except download music.

    So what exactly do you think everyone was getting broadband for? What snazzy web sites and rich media web 2.0 things did they spending their time on – there weren’t any.

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