Monday, June 09, 2008

Inconveniently Calm In The North Sea

On March 18, referring to the Federal Reserve, I wrote:

They're telling you what they're prepared to do. If it drives oil to $150 or $200, a gallon of gas to $8 or $10, and the dollar down another 25%, they will do it. I can't emphasize that enough. That doesn't mean go out and load up on gold or oil. They've had huge runs, are infested with momentum players, and are due for a pullback.

On that day, oil closed at $109. Last Friday it winked at $150, trading just shy of $140. (And checking on the "due for a pullback" part of that post: oil fell 8% in the three trading days after March 18. Gold immediately plunged $81, finally bottoming in early May after dropping $153 from the day of my post.)

Last week was important, because there was no oil-specific excuse for what happened. No weather in the North Sea, no fog at U.S. ports, and nothing new for the peak oil prophets to get breathless about. The media was forced to focus instead on central bank/currency factors. I've warned (most recently in this post) about the danger of a Treasury secretary losing credibility and called for Hank Paulson to be replaced. With Paulson's credibility shot, Bernanke tried to talk up the dollar last week by getting hawkish on inflation. But especially post-Bear Stearns, Bernanke and this Fed have as much credibility as Paulson. So we have a dangerous and exceedingly rare situation in which a Treasury topper and a Fed chairman have both lost the ability to influence the foreign exchange markets -- and by extension, the price of oil -- for longer than a few hours. And we're coming into what's traditionally the most volatile part of the year for financial markets. This should be interesting.

If you're Bernanke, the playbook from the past few years stays the same: you continue to do and say whatever's necessary on any given day. You also hope that something comes along to both serve as an excuse for the spiraling price of oil and distract the public from it. If it also boosts McCain's chances in November (and therefore the prospects, currently dim, for Bernanke to stay on at the Fed for another term) all the better. That, one would think, is where the "rogues" come in.


Blogger Tony said...

The currency crisis is not over.

Lehman going to the mattresses may mean another bailout. The ECB hinted at a tightening which will devalue the greenback further.

Recession was punctuated Friday with the bad employment data-- heck even BLS finally sees a recession.

Oil has run inverse to the dollar for several quarters, but now we may see reduced demand that brings down oil along with the dollar, at least in the short term.

6/09/2008 7:58 AM  
Anonymous Anonymous said...

Was surprised to see Bernanke so openly vocal on dollar, which has always been Treasury's turf.

6/09/2008 2:03 PM  
Anonymous Anonymous said...

Was surprised to see Bernanke so openly vocal on dollar, which has always been Treasury's turf.

That fiction they maintain is always good for a laugh :P

6/09/2008 4:16 PM  
Anonymous Anonymous said...

In the comments thread of another blog, somebody posted this:

"Speculators know if they invest heavy in oil it will bring stocks down. They short the stocks across the board. They bet the stocks will fall. Then they buy big futures of oil and keep buying until they drive the price up about 10 or 11 dollars a barrel and the stocks drop like a rock just like the 400 points today.

They make a huge profit from the stocks falling then they sell the oil futures at the higher price and profit again. This in turn brings the price of oil down and the stock market begins to rally again. They can repeat this as long as Bush, Dick, Bernanke are involved or looking the other way."

Is this really how it works?

And if it is, how can we stop it?

6/10/2008 10:09 AM  
Blogger Mr. Hedley Bowes said...

Stop it? Isn't this what everyone on the right has been fighting for? This is merely free market capitalism: so unfettered it's able to fly into your bedchamber, punch a couple holes in your neck and begin extracting value. When all the value's extracted, it flitters off to the next warm-blooded body. Voila! Just like Friedman promised!

6/11/2008 4:43 AM  
Blogger LFC said...

C'mon. Bush has a strong dollar policy. He told us so multiple times. Why do you have to keep looking at his actions? Isn't Bush's say-so good enough for the world anymore? [/snark]

6/11/2008 5:54 PM  
Anonymous Anonymous said...

I don't have much of an opinion one way or another of Hank Paulsen's tenure as Treasury Secretary. Given the economic cards he's been dealt since taking the job and President Shit-For-Brains that he is serving under, who could do a good job in that capacity right now?

Warren Buffett likely would find himself similarly disparaged in that job these days, I suppose.

6/21/2008 11:15 PM  
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