The Price of Oil Jumps Higher

And now… today’s Penning for your thoughts…

Good day, and a wonderful Wednesday to you.

The currencies, for the most part, are looking good this morning. There is an exception or two, like the euro, which got hit with a bad Factory Orders number yesterday, and then followed that up with a bad Industrial production number this morning, thus proving that the small gains made in the economic recession recovery, have been a false dawn, and that the recession here, which is probably caused to weaken even more now because of the Global Growth slowdown, is still in place.

So, while the euro is above 1.12, this morning, it is not on the rally tracks like most of the other currencies.

The biggest mover and this time it’s to the upside, overnight is the price of oil. West Texas Intermediate (WTI), which is the oil price that I always use, as opposed to the Brent oil price, jumped from $46 to $49 yesterday and overnight. WOW. Oil hasn’t been this close to $50 since July. So, what was behind this move?

Ahhh grasshopper, look to the U.S. supplies, which were supposed to show an increase, but instead posted a drop of 1.23 Million Barrels last week.  Now these drops in inventories/supplies have been thought to be on the horizon, given the number of oil rigs shutting down, but if the price of oil is going to rise above $50, then we might see some of those rigs reopening.

There was news from China overnight, even though they are still on their week-long National Holiday. Chinese September foreign exchange (FX) reserves fell $43 billion to close out the month at $3.51 trillion. this was quite the slower pace from the August drop of $94 billion, but showed that the Chinese were still intervening quite a bit to influence the direction of the renminbi.

The thing that can be tricky when doing these calculations on FX reserves, is that the valuations of the holdings can change quite a bit, thus adding to the total or subtracting from the total. But, from my view in the cheap seats, I thought the currencies held pretty Steady Eddie vs. the dollar in September, so the valuations here shouldn’t be causing any variations in the total reserves.

Well, looky there! The Aussie dollar (A$) is closing in on 72-cents. WOW!  I was impressed earlier this week when I saw that the A$ had moved above 71-cents!  It’s all about the sentiment, folks. And the Reserve Bank of Australia (RBA) came out the other night after leaving their rates unchanged, and showed that their sentiment was positive about Australia, the economy, and interest rates.

I don’t know how many times in the past I chastised these guys at the RBA for dissing the A$ any chance they got. Well, not the other night, and if I recall correctly, at the last RBA meeting, RBA Gov. Stevens, also sounded a bit upbeat. So, is this a change of heart for the RBA? For now, yes.  But should the A$ begin to even think about going much higher, I’m sure the RBA will find the words to bring it back down.

Well, I’m not alone in my thinking that in 2009 when the first round of QE was announced here in the U.S. that it would bring about much higher inflation. For it was pure money printing/creation. And in the root sense of things, money supply should be equal to or near the inflation rate. But I was wrong about QE causing inflation.  Yes, inflation is higher than what is recorded by CPI or even the PCE, but it’s not even close to what I thought it would be by now!  So, there I was feeling sorry for myself for getting that whole thing wrong, and I came across this…

I got a kick out of Tony Sagami’s weekly letter that can be found here, the same letter I’ve highlighted snippets of before. Here he talked about deflation. Let’s listen in:

I have said this many, many times before, but repeat after me: ZIRP and QE are DEFLATIONARY!

The reason is that cheap (almost free) money encourages over-investment as well as keeping zombie companies alive that should have gone out of business.  Both of those forces are highly deflationary, and unless you thing that Janet Yellen is going to aggressively start jacking up interest rates, you better adjust your portfolio for years and years and years of deflation.

Ahhh, but was he saying that in March of 2009, when the first round of QE came off the printing press?  I don’t know, because I just found Tony Sagami, in the last couple of years.

With the jump in oil prices, the petrol currencies are all looking perky this morning, with the Russian ruble leading the pack. Again, leave it to me, to write something pointing out all the problems that the Russian economy has right now, and how that should keep a lid on the ruble (see Sunday’s Pfennig here)  and then watch the currency gain huge chunks!

UGH!  I give up. I’m a dinosaur. I’m like Puff the Magic Dragon, who lived by the sea, and frolicked in the autumn mist in a land called Honali. And then one day it happened. and Puff that mighty dragon ceased his fearless roar!

Yes, longtime readers know that I’m all about fundamentals. Fundamentals drive trends, and give the chartists something to talk about. But like Jackie Paper, fundamentals come no more! I keep thinking that I see fundamentals making a return. And then Poof! It’s all about sentiment again. Oh well, I’ll keep trying and eventually fundamentals will return for good, but until then, I’m going to go back into my cave and cease my fearless roar!

Well, I was bang on with my expectation for a HUGE widening of the U.S. Trade Deficit from August (and before I go on, I have to thank Dave at the 5 Minute Forecast for putting my name and thought on the Trade Deficit up in lights yesterday! YAHOO!). Exports fell 2%, and imports rose 1.2%, to bring the deficit in August to $48.3 billion up from July’s deficit of $41.8 billion. And every article I tracked down on this data, not one mentioned anything about the strength of the dollar having something to do with the widening.

Sure the economies of the world are suffering so their imports (our exports) will slow. But think about this for a minute: first and foremost, anything that can be made here in the U.S. can be made somewhere else, at a much cheaper price (think wages), so that’s strike one against our exports. Then when the dollar is unwarranted in its strength, our exports are even more expensive.

So, unless you’re willing to do something about the cost of making things (good luck with that conversation!) you’re going to have to do something about the cost of the dollar in the terms of transaction.

Remember in 2010, when the U.S. President said in his State of the Union Address that he was pushing for an initiative to double exports in the next year?  What he was saying, was that the dollar had to be weakened. I talked about it back in 2010, and thought now, that it was a great illustration of what I’m talking about here.

Oh, and don’t forget that just  a couple of months following that Address that the Fed announced their latest round of QE.  So, the Fed knows how to weaken the dollar if it gets the wink and nod to do so. Of course one would have thought that having ZIRP (zero interest rate policy) would be enough, but when everybody else is doing it too, well then you have to do something else. Can you say QE4?

Gold is flat today — so far, that is. Yesterday in the afternoon, I received an email from a dear reader that pointed out that gold had put in a good performance so far that day.  I responded, true, but there’s still a lot of the day to come, right? And don’t forget that some of the takedowns in gold have come in the after-hours trading. But, nothing bad happened, and gold was allowed to hold onto its gains for the day.

After all the selling gold saw in the past year, based on the idea that the Fed was going to hike rates in 2015 at least two times (per the Fed, not me!) one would think that now that those rate hikes seem to be on the shelf, that it would be soaring, and gaining back that lost ground. But maybe it’s better this way.

Did you know that the U.S. auctioned $21 billion in zero yield, 3-month T-Bills the other day? That’s right, the U.S. came out with $21 billion in zero yield 3-mo T-Bills, and $21 billion was bought! Now does that make any sense to you? It sure doesn’t to me!  In “real yields” that means the holders of these T-Bills are earning NEGATIVE Yields!

Recall that “real interest or yield is the rate minus inflation) The PCE is 1.2%, so that means these holders are losing 1.2% for their cash invested in these T-Bills. And there are some T-Bills that are trading with negative yields in the secondary market.

Who buys these things anyway? Oh! And yes, I know T-Bills normally trade with a discounted price to par, which then the discount is equal to the yield.  In case someone was going to attempt to tell me that I didn’t know you know what from shinola in saying T-Bills have no yield. You’ve got to get up pretty early in the morning to think you are going to make me look stupid!  Because I wake up looking like that! HA!

So. In the recent past, we’ve had the tech bubble, the housing bubble, and would have a treasury bubble if not for QE.  And now we have several bubbles getting blown to larger sizes.

But did you know the earliest economic bubble in recorded history?  Sure you do. It was the Tulipomania that ran 1634-1637.  So, let’s see if this repeats itself throughout history. I want to thank G. Edward Griffin, the author of the Creature From Jekyll Island, for a lot of this:

It came to pass when a rare flower called a tulip was discovered in Constantinople. When the root bulbs were brought into Holland, they became a status symbol among the wealthy ? much as race horses or rare breeds of dogs are today in our own society.

The price climbed steadily until tulip bulbs became, not merely symbols of status, but speculative investments. At one point, prices doubled every few days, and speculators were seen everywhere amassing great fortunes with no output of labor or service. Many otherwise prudent people found themselves infected by the hysteria, They borrowed against their homes and invested their life savings to get in on the windfall. Contracts for future delivery of tulip bulbs ? a form of today’s commodity market ? became a dominant feature of Holland’s stock market.
Tulip bulbs became more precious than gemstones.

As new varieties were developed, the market became more complex, requiring experts to certify their origin and their grade. Prices soared, and some bulbs sold for the equivalent cost of a new automobile in today’s world.

Then, completely without warning, it was over. Overnight, there were no buyers at any price. Speculators by the thousands saw their life savings? And their dreams of easy wealth? Disappear together. The Tulipomania was over.

Chuck again. Same thing holds true for all the failed currencies in history that were taken over by another country in a war. The rulers needed more money supply, and created it, whether it was tobacco, or denarius, or Chinese money.  So, that brings us all the way back to QE, and money printing. see the connection?

That’s it for today. I hope that you have a wonderful Wednesday!

Regards,

Chuck Butler
for The Daily Reckoning

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