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.