“Every crowd has a silver lining.” – Phineas Taylor Barnum.
We are all oil experts now. As simple-minded trend-followers watching CNBC sector analysts on Wall Street have spent recent months trampling over each other to issue increasingly facile pronouncements of ever-rising price “targets,” the value-added commentary department for oil was temporarily closed after the Financial Times quoted Tom Bentz, “senior energy analyst” at BNP Paribas, who exclusively revealed on June 7th that, “It’s still a bull market in oil.”
Presumably mere junior energy analysts would have been unable to issue such piercing insight into the nuanced minutiae of the hydrocarbon complex.
But all of this was then effortlessly transcended last week when Alexei Miller, the objective and otherwise wholly disinterested observer of the oil market who happens to be chairman of Russia’s largest energy company, Gazprom, warned that crude oil prices could reach $250 a barrel within the next 18 months.
If it’s not too late, we’d like to pitch our hats into the ring: oil could reach $1,000,000 a barrel by next week. But it probably won’t, given that the developed world seems to be heading inexorably toward recession, and while China is undoubtedly a big oil consumer (c. 7 million barrels per day) it remains significantly smaller than the US with consumption of around 20 million bpd. And if it does, this whole dollar weakness thing will really have spiralled out of control.
Where oil, currencies and rising prices effortlessly merge is in the context of (generally blunt) administrative policies to address inflation. The US has at least bought itself some well-needed breathing room; the mandate of the Federal Reserve is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
As Governor Mishkin has put it, because long-term interest rates can remain low only in a stable macro environment, these goals are often referred to as a dual mandate.
The Bank of England claims to have two core purposes – monetary and financial stability. Realistically, however, in the light of what George Soros has suggested is the worst financial crisis since World War II, and given that the Bank’s supervisory role has been largely emasculated by a triumvirate structure that doesn’t work, its primary if not sole focus is effectively a monetary policy to maintain inflationary stability.
(In other words, if forced to choose between a high-inflationary rock and a recessionary hard place, the Bank is obligated to favour the recessionary hard place. That said, Gordon Brown’s one remaining legacy of any credibility – an independent central bank – is in danger of being sacrificed, too, on the altar of political expediency. If the Bank of England manages to raise interest rates in the teeth of a domestic housing market collapse and looming recession, its senior movers will be worthy of some kind of medal for attention to duty. Perhaps a Ludwig von Mises Award for the promotion of Sound Money?)
The European Central Bank has its primary objective as the maintenance of price stability in the Eurozone (that is, inflation below, but close to, the arbitrary-looking figure of 2%). A bundle of other objectives follow in its wake, but price stability prevails.
We will soon see just how robust these mandates are amongst the world’s most important central banks, plus the Bank of England. With residential housing markets sinking fast in the Anglo-Saxon economies, and with banking sectors still reeling from the aftermath of the credit market binge, only truly bold and principled price stability merchants will be willing to hike rates in the cause of low inflation, particularly since the troublesome oil and food price inputs are beyond the power of any central bank to ameliorate.
If central bankers feel awkward at this revelation of the paucity of their powers, perhaps they should have been more careful to read the small print of their (absurdly constrained) mandates first.
Central bank governors have, like oil analysts, been trampling over each other over the past week or so to prove their virility in the fight against inflation. Bond markets have reacted as if they meant it. Two year US Treasury yields, for example, rose in response by the most in 12 years. Indeed the pace at which monetary accommodation has become monetary purgation in the eyes of the market is extraordinary.
Whatever transpires, the nervy volatility of bond yields points to the sort of end-of-the-cycle jitters that accompany a secular change in fundamental direction, as a great mass of investors wake up, at varying intervals, to what’s happening around them.
With the greatest respect to the authority of confused central banker jaw-boning, however, the real story lies not within a bunch of easily rescindable statements, but rather within the Federal Reserve bail-out of Bear Stearns as a going concern, which marked the ‘they shall not pass’ turning point in the defence of ‘too bank-like to fail’ institutions, along with the end of the ‘armageddon’ trade, back in mid-March.
This does, however, leave us with the following problems:
- A bear market for government bonds.
- A bear market for western market equities (outside certain key sectors) given the likely decline looming in consumer spending.
- A bear market for cash (given the corrosive impact of inflation).
More benignly, fund managers with an unconstrained investment mandate and an unconstrained asset universe can hope to steer capital away from the obvious blackspots and toward some specific pockets of promise. But traditional equity (and bond market) index trackers run the very real risk of getting, in the vernacular of fund management, completely hosed.
This article has 11 comments:
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toddpw
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6 Comments
Jun 13 08:17 AMTo find out how much, all the central banks need to do is stop jawboning and actually hike rates. If there really is a substantial speculation element to the prices, then that should spook them out of the market and return commodities to a more realistic uptrend.
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Martin Lowenthal
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42 Comments
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Jun 13 08:57 AM-
Edward Janeck
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133 Comments
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Jun 13 09:36 AMtheinvestingspeculator...
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Reinko
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346 Comments
Jun 13 09:55 AM(Proof that he did not understand: That conondrum thing of Alan...)
Right now ECB Jean Claude Trichet also does not have much clue either because just a few days ago he stated that European inflation was 'anchored'. (Anchored inflation means that workers cannot get higher wages to compensate for it).
Well in my country Holland just the day before yesterday the latest wage round with the unions were closed and all got above inflation wage increases. (This on the back of a record number of strikes in all parts of society, even the police.)
So here in Holland inflation is embedded: That means workers anticipate on future inflation expectations.
And today brought the news that in the 15 nation Euro zone wages will grow 3.3% on average, that still is below inflation expectation but in Spain the shops get empty just on the back of high fuel prices. So likely most European workers do not like a Trichet anchor around their neck...
Source:
www.bloomberg.com/apps...
And that guy Bernanke? Don't make me puke, he is one of those who induce a 'cash is trash' mentality so funds like pension invest less and less for the long haul and act more and more as day traders on food and commodity markets. There are even Swiss banks who advertise with these kind of new products, they call it 'Thinking new perspectives'.
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Reinko
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346 Comments
Jun 13 09:57 AM'so funds like pension funds invest...'
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rainman
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48 Comments
Jun 13 11:45 AM-
drposhmoney
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9 Comments
Jun 13 07:17 PM-
JasonC
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367 Comments
Jun 13 07:58 PMOil is in a typical bubble of a kind we have seen several times in its past. Real term moves of a factor of 4 in oil prices have been a recurrent item clear back to the US civil war. In the 70s the biggest one went 8 times, 4 in the first oil shock and a final factor of 2 in the second.
We might duplicate the last in the next year or two, or not. Tulips got expensive once, too. Then they weren't.
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moonbat1775
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707 Comments
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Jun 13 11:24 PM-
David Lentz
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357 Comments
Jun 14 10:13 AMMaybe a few will have clueless leaders (Zimbabwe, ... ?) who will churn the monetary printing presses and embrace hyperinflation (and inevitable collapse), but the vast majority will either dither and wither or raise rates to the brink of crushing their local economies (and we are a LONG way away from that) in hopes of slowing demand.
In either case, we ARE going to see price inflation, regardless of whether the CBs cave in to political pressure to stoke inflation to "mitigate" the price inflation with monetary inflation (a bad idea).
In the end, alternative energy solutions that make oil (and possibly coal) obsolete will arrive, in the forms of new ways to generate power, and better ways to conserve it. We have not even scratched the surface of what is possible in either area.
Worst case? Famines+wars bring on the Malthusian result, lowering the population to levels that the global economy can support.
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flow5
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417 Comments
Jun 14 01:58 PM"The selling started overseas when a key gauge of Chinese stocks slumped 8.8 percent in Shanghai Tuesday - the worst one-day selloff in a decade - on concerns that the government would interfere to cool the speculation that drove the market up nearly 130 percent last year."
Well, world market declines in this case - were home grown. The U.S. has the world's largest economy & any significant changes made by the FOMC are quickly transmitted through the international money markets (i.e., Euro-Dollar market).
Leading up to the crash (commodities, et al.), the Fed tightened (the trigger), but much quicker & much deeper than past seasonal mal-adjustments (the Fed follows a real-bills doctrine/mandate).
Those who don't understand money & central banking (e.g., Bernanke), pointed the finger the other way.