Tuesday, September 17, 2019

Oh, How Crude!

A major crude oil installation deep inside Saudi Arabia was attacked  by Yemeni Houthi drones causing prices to spike almost 14% in a single day. Gasoline prices spiked in Europe.
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 Never mind the obvious questions, eg its 800 km to the Yemeni border, could air defense be so inept at such an important installation?...

The major issues here are three:
  1. The spike in oil prices most certainly benefits Aramco and its upcoming IPO.  I think this answers the millennia-old question asked by Roman judges: cui bono? Who benefits?
  2. Will this boomerang and, in conjunction with climate change, finally get people to revolt against fossil fuels?  People are creatures of habit, but never underestimate the power of a steamroller, once it gets rolling.  To use another Roman proverb, vox populi Deus irae. 
  3. Could this be a blessing in disguise for monetary policies around the world? If higher oil prices stick, inflation will uptick significantly perhaps spelling an end to the ultra accommodative, zero and negative rates currently in vogue. See Chart below: oil price spikes have a serious impoct on CPI headline inflation.

It is my firmly held belief that prolonged negative interest rates create many more problems than they solve.  For one, they demolish the very foundation of banking upon which  our entire socio-economic model is based. Oh, they're ok as an emergency measure for a very limited period of time - a bit like morphine: fine on the way to the hospital or in field conditions, but after that you create addiction.

This is were we are today: our economies have become ultra-reliant on soporifics, opiates and hallucinogens.  Markets can only justify their lofty levels by assuming that the cost of money will remain zero, now and ad infinitum (in bubbly markets, forever is a week).  That's the hallucination part, by the way.

So, could a spike in crude prices drive a spike through the heart of Money For Nothing?  Don't know, but it's certainly a (c)rude awakening...


6 comments:

  1. Rude awakening indeed! Especially if hostilities continue, could this possibly lead to stagflation, where prices increase but business activity slows? And I imagine there is a "sweet spot" for interest rates. If rates go too high governments have increasing problems financing their debt and maintaining "reasonable" deficits.

    ReplyDelete
    Replies
    1. With massive QE, negative interest rates and hugely inflated central bank balance sheets, we are in uncharted territory viz. CPI inflation and monetary policy.

      To top it off, the US is running such high budget deficits that new Treasury bond issues are creating repo funding problems in the O/N market.

      If the dial moves to "risk OFF" it will really be a mess.

      Delete
  2. I would like to point out that long term, at least from a technical analysis perspective, the monthly charts on the major US stock market indexes are still in an uptrend (trading above the moving averages). This could all change and there's always the possibility that the charts "break", but the likelihood is that they continue upward. Stocks have become a store of value it seems...

    ReplyDelete
    Replies
    1. A short history of the stock market. We live in a fungible world

      Delete
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