It won't be smooth - and the economy IS hurting - but when the OECD nations decide that what we need is a little inflation, sending faxes and calling your Congressman to stop the Paulson Plan is a lot like putting your finger in the proverbial dyke.
The deflation scare was SOOOOOOOO last week (month). And those price declines in the commodity complex? That was the forced selling of leveraged positions caused by the credit environment. Looks like deflation. Feels like deflation. But not the same thing at all. The cure for high commodity prices IS high prices, and the cure for low prices is low prices, all else being equal. Shortages change the rules a bit.
Money is going to come out of the mattress (Treasuries and Precious Metals) until it doesn't. If gold cannot rally in a week like last week, it will need something BIG - like hyper inflation - to do the trick. Considering the world wide coordinated interest rate cuts and bank guarantees...
Speaking of rate cuts. I was speaking with the mad scientist tonight. As always, he has a decidedly non U.S. centric view of the markets that many Wall Streeters lack. His view was that much of the rest of the world has room to lower rates between 3 and 6 %, and with a Fed Funds target of 1.5% (and actually at 1%) the U.S. does not have this arrow in its quiver. Giving that some thought... doesn't that mean that if world Oil supplies do not increase that less oil will make it tho the U.S. because the growing economies (increasing Oil consumption) will be able to out bid the U.S.? Hmmm... that sounds vaguely important.
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Crop prices are not sufficient to incentivize farmers to build grain inventories, in my humble opinion (you never hear the American Socialists lambasting farmers as greedy businessmen). But with high Oil and fertilizer prices you can't have (relatively) cheap food and happy, solvent farmers.
There are some opportunities here... for both farm land and grain futures.
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The price of Oil in the short term can go down as easily as up. Maybe easier. That will set up the supply constraints in 2010 onward. The costly marginal barrels will not be produced at today's prices, and the with credit constrained infrastructure will not get built. If you want and incremental increase in Oil 5 years from today, you had better started on the field a couple of years ago. This is like the bulge in the snake, what comes out has to go in first.
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How much did the credit crisis shut down the world economy? That is the $64 question. Until we know the answer to that trading Oil will be like throwing darts. Sorry, that pretty much describes trading in the best of circumstances... How about throwing darts with a blindfold on?
We need more data.
Back soon.
Mentatt (at) yahoo (c0m)
7 comments:
If oil and gasoline prices are collapsing (which they are), if not because of a comprehensive collapse in demand for just about everything (a side effect of deflation), then it must be because of a new supply of oil from somewhere (which is nonsense). Prices are collapsing nearly everywhere because of this economic downturn -- people can't spend, credit is being destroyed and deflation is the result. They are cheering the lower gasoline prices, but they don't see the oncoming unemployment from squeezed profits which will follow.
Scott:
It is a bit more complicated than that.
Unemployment in the U.S. is certainly going to rise. But that is a relative thing, too. Worker expectations in the U.S. are EXTREMELY high. Most Americans expects to go to college, work in a professional capacity for 40 hours per week in a temperature controlled environment, and retire with millions of $.
Workers in China expect to work 12 hours per day in a mind numbing job in terrible conditions, with little pay and less comfort.
Employment as Americans KNEW it will have to change, and change greatly, if they wish to have low unemployment.
The funny thing is, it is the young, educated, liberal American's that so desperately wish to get to the Chinese model, lambasting as they do the American credit system which spawned the very student loans that got most of them educated in the first place, among other things.
Other than a stint at Bear Stearns, I have never had a real job (I was either a partner or owner), and even at Bear I have NEVER had a salary (and I am pushing 50). American's CAN (and WILL) learn to hustle and work at a multitude of tasks and opportunities in order to make a living, much as the U.S. illegal immigrant population does at this moment, rather than at a 40 hour per week job with a salary.
Oh, and they will have healthcare, but perhaps not health insurance. They will take MUCH better care of themselves, or suffer the consequences. They will save (under consume) whatever it is that they produce, smoke less, drink less, be thinner, etc...
This is not at all what the young, educated, liberal American is used to, so it should be VERY interesting to observe the adjustment period.
(Scott = Bureaucrat. Sorry. :))
I am most Americans then (college, professional, 40 hrs, nice office, $833,000 saved by 2023), but I know I'm not. Only 2/3rds of people work in offices, 1/4 have college, I make more than twice the average salary. And yet I find myself greatly reducing spending, I got caught up in (necessary) debt, I know I don't need 1/2 the shit I have, etc. If we can't agree about deflation, can we at least agree a massive change in thinking is now coming around. People would like to spend, but they can't spend, and furthermore, maybe they just don't WANT to spend. The Xmas sales #s will be a disaster.
Bureaucrat!!!
How are you bro?
Who said we don't agree regarding deflation? We need more data. Just because commmodity prices crasshed does not mean deflation as defined by your hero. Governments can cause inflation, I firmly believe, when it suits them.
It suits them now.
However, I am willing to change my mind in an instant and bet the other way.
Yo Bro! :)
You need to have more princlples. Changing on a dime when you hear different "data" is gonna get you accused of being wishy-washy. ;) At any rate, I'm just not looking at this techically, like Mish. I'm looking at an exhaused, indebted, aging population who have had to hope and hope that the next "bubble" (tech, housing and next is alternative energies) will restore their financial cushion. How much money do you throw down a rathole before you get religion? Maybe it is the caveman in me, but I think the cheap credit spend-spend days are over for awhile.
Bureaucrat:
I trade for a living, in real time, with real consequences. I will not have a nickel left if I insist that I am right when I am not.
BTW, looking at the Fed's balance sheet would not imply deflation.
Be well!
Stock market is extremely undervalued by every measure. Will wriet on this blog soon.
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