While listening to CNBC this morning, the NYMEX floor reporter was commenting on the recent run up in the price of crude oil. She stated that the oil market was in “backwardation”, and this meant that this was a ”demand driven market”.
This shocked me because only about a month ago I did an Excel chart of the current and all future contracts and the market was purely a contagion market all the way out. Prices of the further out markets ran up gradually, hitting a peak about a couple of years out then gradually declining, but never down to the current price of the closest contract.
So I ran a chart of the current market and sure enough, it is now completely in backwardation. Only the September contract is higher than the August contract, which expires this week. All other contracts are lower with the lowest contract, December 2014, at $72.25.
I find this very significant. The current price is up around the world because a shortage of supply is driving the market. The current price is what buyers are having to pay to get oil. The futures price is what traders expect the price to be at in the future. They could be very, very wrong in that assessment, and I believe they are. But the point is, the current price represents actual demand and because it is worldwide, not just local, that cannot be denied.
One more important point. Last year, and the year before for that matter, the price of oil had about a $20 terror premium built in, (more or less). But any terror premium is reflected far more in the futures contracts, six months to a year out, than in the spot price or the price of the near term contract. That is, traders expect something might happen in the future to push up the price of oil. Now traders are far more relaxed about the future, expecting prices to drop. Therefore I conclude that the current price of oil is far more reflective of the current availability of supply than it has been in recent years.
Edit: One point I forgot to add. OPEC meets in September and it is likely traders expect them to increase production then. And when the don't??? Look out, the preverbal excrement will then hit the fan.
If that were so then that same expectation would be reflected in the equities market. It quite obviously is not because the market is currently at an all time high.
The stock market reflects what traders expect in the future. They obviously expect all smiles and sunshine for the economy in spite of what is happening in the credit or housing market. They expect oil prices to fall and they expect the economy to continue to boom.
Expectations for stocks and bonds don't have to coincide. Investors may be pushing stocks to a new high as they try to get out of the debt markets - out of the frying pan, into the fire (this autumn IMO). They may still be anticipating that credit tightening could reduce the speculative gloss on oil. IMO the oil price will tank, along with most other asset classes across the board, when the markets finally fall.
Expectations for stocks and bonds don't have to coincide.
Gad, how could you possibly be more wrong? Expectations of the stock market and bonds always coincide. People move into the credit market when they expect equities to fall and vice versa. That is the way it always has been and until the market dissolves into chaos, that is the way it always will be.
That is, if investors expect a greater return from bonds than from stocks, the money will move their investments into debt instruments, both of the government and industrial variety. This always happens when people expect the stock market to fall. But if they expect the equities market to keep on booming, they will move from bonds to stocks, causing interest rates to rise as debt instruments must compete with equities for the investment dollar.
That is exactly what is happening right now. Interest rates are rising as they try to compete with the stock market. You might note that existing debt instruments are falling in price. This is because the price of an existing debt instrument must reflect the current interest rate regardless of the interest rate the instrument was issued at. That is if a $1000 bond pays 4%, then that bond must drop in price until that 4% is really 5% if 5% is the current going interest rate. Of course other things must also be considered like the amount of time until redemption date, at which time the bond will be worth exactly $1000, no more, no less. Your local broker will give you the formula for this and I am sure it can be found on line.
Karlof1, traders in commodities as well as day traders and short term traders in stocks and bonds are usually referred to as speculators. However, by a wide margin, most equities as well as bonds, the buyers and sellers are usually investors. If you have a mutual fund then you are an investor. If you hold a stock or bond for over six months then you are referred to as an investor.
Clearly it is a matter of semantics but by a very large margin, most equities are held by investors and institutions owned by investors. Of course it probably would be better to say "investors and speculators" but if one chooses to use only one word, concerning equities, then investors is the better word.
institutions may be long term investors, but shorter term price trends have increasingly been set by hedge funds and (per Bill Cara) HB&B- humongous banks and brokers, i.e., the goldman sachs of the "investment" world. stock margin is at an all time high on the NYSE, yen carry trade is enormous, derivatives growth is exponential, etc, etc, this is the engine of speculation. currently there are so many exponential blowoff stock charts it boggles the mind! the rational mind that inhabits TOD would probably agree that financial markets are and have been in a speculative frenzy. further, if inflation is running around 5% which even the Economist asserted, then longer term u.s. treasuries hold no value currently, particularly given the public statements of weimar ben.
Although I thoroughly enjoy reading your contributions to the threads, I do not believe that your bond vs stock assessment is entirely correct.
There are times when stocks and bonds rally together, as in a time of 'soft landing scenario' expectations (Jun '06- Nov '06). There are times when bonds sell off and stocks rally ('99, '87- through Sept, '07). Here are two graphs, sorry i don't have better examples:
I also believe that the future of bonds is venturing more into uncharted water as it is in the best interests of our largest trading partners (China, Japan, etc) to recycle dollars back into the 'system' to enable their trade surpluses to continue. I believe that to be the lynchpin in the fragile balance as opposed to the theoretical 'investor' who switches between stocks and bonds.
Also, the market is ruled by funds who largely do not switch between stocks and bonds until the 'investor' redeems, and my experience has been that investors switch to bonds After stocks decline/begin declining.
dVincent, what you say is often true but it is the exception rather than the rule. That is, the market will often move up despite rising interest rates. When this happens there is usually something else, something very bullish moving stocks.
Traders watch interest rates like rabbits watching a hawk. Witness the market everytime the Fed raises or lowers interest rates. When the announcement is made, sudden spikes usually mark his decision.
The stock market just loves low interest rates. This means credit is very easy to get meaning people will be buying houses, cars and all kinds of stuff. But if money gets tight, the housing market drops off, profits drop off and the market will plunge.
But of course all these things take time. In the short run, anything might happen. But in the long run, stocks and interest rates move in opposite directions.
Again, the market can move up in the face of rising interest rates but it does this despite the rising rates and not because of them. And if interest rates continue to rise this will eventually have a devestating effect on the market.
Well, for every 100 people there are 100 theories. Mine is: If there is no cost for money, i.e., a zero interest rate, you will eventually get deflation. This is because it costs a business zero to borrow and expand. So, overcapacity of all material things occurs. See, e.g., Japan for the last 15 years.
Ron-
I agree, and am afraid rates will continue to rise despite all MSM market gurus that expect rates to fall. We are in the early innings of a structural shift away from high investment flows into financial assets and little into hard assets (rig construction, mine expansion, etc.) The cycle historically continues for over a decade and is accompanied with higher interest rates. This time it is likely to be the end game.
Regarding your comment on the next OPEC meeting (Sept) ... the call has gone out for more crude (IEA) and the backwardation of the oil curve expecting more crude from OPEC, what a meeting that will be!
I was about to post a question to the board and this seems like a reasonable place to put it. I'd like to get peoples opinions on the apparent disconnect between oil prices and the stock market. The DOW just hit 14k, and at the same time oil is up .70 this morning to almost $75. It seems to me that cost has to be absorbed somewhere, either with the consumer or the companies bottom line. So why is the DOW hitting new records with oil so high? Thanks in advance.
Shawnott: Both the Dow and the price of oil will rise in resonse to increased liquidity (M3) and a fall in the value of the US dollar. If the US dollar had kept its strength against the Cdn dollar reached in 2002, oil would be priced at $47. Needless to say, the Dow hasn't set any records when priced in Cdn dollars (or many other currencies).
This yet another piece of the puzzle (big picture) why I think that there will be an large jump/switch in oil pricing sometime soon(=next couple years outside).
Followed by many other ugly things...petro-currency switching, military muscle flexing or worse, recession(s).
The M3/monetary inflation can only do so much before other countries begin to bail. Like Russia and Iran, others will have to follow eventually.
I think people seem to be forgetting that almost every developing and industrialized country in the world is inflating their money supply. Its not just the US!
It's kind of hard to see but the blue line is the Canadian Dollar in relation to the US dollar and the red line is the Dow. The Dow returned 2.36% in dividends during this time and a daily interest Canadian bank account did about 3%. So I guess for foreign investors it would have been good to sock your money away in a sleep easy ING account.
Ever since Nixon did the "Bretton Woods" thing back in 1974 and got us off the gold standard, we have been able to print however much currency it takes to make everybody's "earnings" numbers look good and keep everyone happy.
What miffs me off quite a bit is that the government considers any numerical increase of my retirement savings to be "income", while failing to recognize the dilution of value of my held dollar due to dilution of its value as a loss.
Shawnott, I just heard this explanation of this apparent contradiction on CNBC. As previously oil and stocks moved in opposite directions because of shocks to the supply like Katrena and other things. People feared this would cause shocks to production and delivery of goods. This time it is entirely different. Oil prices are rising because of very strong global demand, caused by very strong global economic growth. Again that is not my explanation but the one I just heard on CNBC.
At any rate the stock market reflects expectations! It does not reflect the current situation except to the extent that the current situation influences future expectations. The price of oil is currently influencing the economy but not to any dramatic extent. People expect oil prices will fall, but not by very much. They obviously expect the stock market to continue to rise. And as noted above, the oil market is in backwardation meaning traders expect oil prices to fall in the future.
Expectations do not necessarily reflect future reality however.
Think of the stock market as the floor drain in a slaughterhouse. The blood comes from an ever increasing supply of cattle (money). The fed has quit posting the M3, the primary indicator of money supply, because they are printing money as fast as they can. This money has to go somewhere. I can tell you that is no longer going to the housing bubble. It has never gone to the people who actually need it, the poor and lower middle class or even the middle class. It goes to the rich. The rich are already rich, but they are greedy monkeys and they will never turn down practically free cash. So, they park their money in the stock market.
Meanwhile, the plunge protection team, using Uncle Sam's printing presses buys up the market whenever it looks like it is about to tank. For a prime example, look at GM. It is essentially bankrupt, yet its stock continues to hold and even rise. This constant infusion of cash into the hands of the rich is exactly what is levitating the markets.
We essentially have a Zombie Market. It is the undead market. How long can this last? As long as people continue to believe that the US government gives a rat's ass about the people. As long as the rest of the world will let the US get away with it. (there are signs that the rest of the world has had it with supporting the US's free ride. Once the oil producing countries decide to quit accepting the dollar, you will see the value of the dollar collapse.) When this happens, all the funny money in the stock market will flee en masse to countries with stable currencies (if there are any). Of course, these countries will demand far more dollars than they would yen or other currencies to buy equivalent stocks, bonds and currencies. It will be pretty much like Weimar Germany's hyperinflation with dirt poor millionaires buying loaves of bread with wheel barrows filled with cash.
If we had not shipped most of our major industry overseas in a fit of greed and stupidity, we might be able to recover in a relatively short time. But, we cannot time travel and kill off the moronic, greed-head traitors who saw fit to gut the heart of America. We are stuck with their evil works. When we can no longer afford to buy our cheap crap, haute couture, common tools, shoes, medical equipment and everything else necessary for life from China, we will find ourselves scrounging for clothes, food, shoes, shelter, and clean water. We will end up like so many people living on the fringes of capitalist society, like people in Manila and Guatemala City. We will be digging through our garbage heaps looking for a pair of shoes, for clothing, for anything still viable and we will starve.
So, to continue the image from above. The blood swirling down the drain is the life's blood of our country. It is your future, your children's future and their children's children's children's future. It will mean the effective destruction of the US.
There are rough times ahead. The neocons on the site will pop a vein about what I've just said because they are the cause of this coming misery and they are just beginning to realize it at a basic level. Some of those cretins will do the right thing and grab their right to bear arms luger and blow their brains out. Others will see it as an opportunity to profit from our destruction. And the vast majority of them will continue to believe their own BS because they had to be awfully stupid to believe the claptrap to begin with. And they will fight to the death to preserve the right of the rich to ruin our country, rape our environment, and enrich themselves at the expense of the hoi polloi.
The blood swirls counter-clockwise and we keep standing knee deep in our own blood.
The US first? I'm not so sure. The dollar is not available for carrying at 0.5%. If Japan would raise its interest rates, which it will have to at some point, the Yen would be dead in the water, the carry traders would be forced to jumo ship real fast. That's a mighty fine conundrum in Tokyo. Dead if you do, deceasad if you don't.
I'm guessing the blast will start in Asia. Could be Japan, or Shanghai, or even somewhere smaller like Thailand, rippling through to bigger markets.
As rising prices become impossible to ignore, perhaps the Japanese will borrow a page from the U.S. playbook and recalculate their CPI to hide the grim reality. However, with the carry trade kicking into high gear, such propaganda efforts will likely not succeed.
The Japanese are pursuing this reckless monetary policy with the deliberate goal of creating inflation, and they are in danger of succeeding beyond their wildest dreams. Despite the tendency of central bankers to argue that consumers are better served by rising prices rather than falling prices, "deflation" was never a real threat to Japan. On the contrary, falling consumer prices are one of the natural rewards that people enjoy in market economies. The fact that this benefit has been denied to most people in modern times as a result of government created inflation is one of the great tragedies of our time. To spare its citizens from suffering the "scourge" of being able to buy products at lower prices, the Japanese are close to destroying one of the greatest savings hordes in history. The question is why are they doing it?
The only logical answer I can offer is that the Japanese realize that if they stop the flow of global liquidity they will destroy the dollar and the U.S. economy. To survive, the U.S. must be able to both limitlessly exchange the dollars it prints for the goods the rest of the world makes and then pay low rates of interest on its IOU's that foreigners accumulate as a result. Were the Japanese to turn off the monetary spigot and raise interest rates to normal levels, Americans would not be able to do either.
There is a huge speculative bubble in China at the moment too.
But as for Japan, why would they do this? If they destroy the yen then the dollar falls anyway if this theory is correct because once the yen collapses there will be no global flow of liquidity anyway.
Ghawar Is Dying as we slide Into the Grey Zone "The greatest shortcoming of the human race is our inability to understand the exponential function.
Your argument correctly implies that it is Japan and China that have the option to make the call as they hold enormous U$S reserves. This is the relevant point.
The US has no option.
Well it has the option to do the right thing and massively raise interest rates, but there isn't anyone with the ballz to do it. The medicine is too bitter.
I suspect that China will attempt to maintain BAU until after next year's Olympic Games in Beijing. The games are of huge financial, cultural and "prestige" importance to the Chinese authorities, and are likely to be the last "Great Games" of the modern Olympiad. London in 2012 might not even get to the starting blocks. Although it might well be better for China to pull the plug now on the US bankruptcy, I believe they will try "save face" for another year, and then let the crash happen. Just one more "above ground" situation to add to the mix.
I am not at all convinced that China wants to "pull the plug" on the US. Like a dealer, China has no incentive to stop supplying his addict. He just has to make sure that he doesn't hold the paper from the addict too long. And more to the point, China has found an outlet for dollars - Africa, used to buy real physical resources and access to resources. It's the foolish tinpot dictators of Africa who think they are getting rich (and they are at the moment). Of course even a few of them are not stupid and are reinvesting those dollars in military hardware or other physical goods. But the vast bulk of Africanized dollars end up in Swiss bank accounts where they will eventually be worthless. And that's good for the US too. While the US tries to keep the velocity of money high amongst consumers, there could be an argument made that a certain subset of the dollars of the world are better off at rest because then they represent no threat to anyone.
My point is that human greed is incredibly inventive and that the existing financial system is more likely to mutate and survive than automatically collapse right away. I don't think the existing financial system will survive ultimately but it's going to take a few decades to take it all apart, barring anything short of a full scale thermonuclear war.
Like I've said before, while many of you are looking for the dollar collapse, I think there is still a reasonable probability of at least one more credit bubble. And I personally believe the next one is in carbon credits because they are so poorly understood, because the market is so new, both of which mean the carbon credit market will be wide open to abuse and manipulation.
Ghawar Is Dying as we slide Into the Grey Zone "The greatest shortcoming of the human race is our inability to understand the exponential function.
I like your reasoning here - about the "resting dollars".
1) re: "Of course even a few of them are not stupid and are reinvesting those dollars in military hardware or other physical goods."
I just have to add "ouch" on the military hardware. I see it as something that doesn't rise to the level of the word "investment", let alone "not stupid".
2) "But the vast bulk of Africanized dollars end up in Swiss bank accounts where they will eventually be worthless. And that's good for the US too. While the US tries to keep the velocity of money high amongst consumers, there could be an argument made that a certain subset of the dollars of the world are better off at rest because then they represent no threat to anyone."
"Better" - yes. (A welcome smile.) May they rest long, esp. if they can't be used for organic agriculture conversion, putting in place the legal rights of women and children, etc.
3) Which brings to mind a funny (odd) thing. It's tragic, really, the different kinds of "threat" and how they interact with each other.
Where something threatens someone's self-image, and the defense against that threat - which is essentially a non-material threat to an intangible construct - ends up having the result of the injury or death of another, for example.
Because here in Europe we have what are called politicians.
They are people who have not starred in movies, or have IQ's lower than 50 and generally don't believe in god:-)
Blair, Chirac, Prodi, Merkel, Berlusconi, Schröder, Sarkozy, Balkenende, you'd trust them all to babysit your first-born, and not sell her off to the highest bidder.
But...I would trust Alex Salmond . Come on the Scots!!! SNP have even got a bit about peak oil on their webiste (well, used to). We talk a mean game and we've fire in our kilts. (Hey i'm scots Italian!)
Our UK politicians can debate we'll. Black is white. I've seen it first hand. These guys are too prude/classy for any hollwood showman shit.
And don't dare forget our kinsmen George Galloway and Tommy Sherradin. These guys have made our court's witch hunters look like absolute fools. I would love to see a debate between these guys and Bush.
Bush"hey guys who runs Scotland these days"
Tommy:"The McDonalds ye fuc**n'i ejit"
Bush: "Great burgers"
Galloway:"Fascist imperiast pigs that company. But..The've started running thier fleet on the oil from the chip pans. Oil for food"
Tommy: " Aye, Galloway. Oil for food. That rings a bell.
Bush:"Say Galloway, you sure made our court jesters look good in that oil for food trial thing.
George Galloway:"I was tryting to rebuid Iraq and look what you did"
Bush: "Yeah our embassy is 110 acres. "
Tommy: "Ye'll drown in yer own blood nazi B***stard."
This is a good discussion and basically, I think other powerhouse countries (Russia, China, India, even Western Europe) are playing chicken with the US. "If you guys are going to print more money, then so will we." To keep the system running, all players have to play along and create credit and wealth out of thin air. This could go on a long time until someone flinches and calls in the cards to see what hand is being held by the other players.
If everyone plays nice and keeps the game going, then we may see no economic collapse of the big guns even in the face of very high crude prices. The smaller players will suffer and already are, but they are outliers when analyzing the wealth of the world (in the eyes of the big players...not me).
So far, I think BushCo has convinced the likes of Russia, China, and India to stay in the game, but we have seen some cracks in the loyalty of the players to the game under BushCo rules. You can bet alternative plans have been mapped out under the radar on how to move away from US economic dominance. I believe these alternative plans will materialize way before massive crude production declines become widely apparent outside our little community.
Oil futures market in backwardation
While listening to CNBC this morning, the NYMEX floor reporter was commenting on the recent run up in the price of crude oil. She stated that the oil market was in “backwardation”, and this meant that this was a ”demand driven market”.
This shocked me because only about a month ago I did an Excel chart of the current and all future contracts and the market was purely a contagion market all the way out. Prices of the further out markets ran up gradually, hitting a peak about a couple of years out then gradually declining, but never down to the current price of the closest contract.
So I ran a chart of the current market and sure enough, it is now completely in backwardation. Only the September contract is higher than the August contract, which expires this week. All other contracts are lower with the lowest contract, December 2014, at $72.25.
I find this very significant. The current price is up around the world because a shortage of supply is driving the market. The current price is what buyers are having to pay to get oil. The futures price is what traders expect the price to be at in the future. They could be very, very wrong in that assessment, and I believe they are. But the point is, the current price represents actual demand and because it is worldwide, not just local, that cannot be denied.
One more important point. Last year, and the year before for that matter, the price of oil had about a $20 terror premium built in, (more or less). But any terror premium is reflected far more in the futures contracts, six months to a year out, than in the spot price or the price of the near term contract. That is, traders expect something might happen in the future to push up the price of oil. Now traders are far more relaxed about the future, expecting prices to drop. Therefore I conclude that the current price of oil is far more reflective of the current availability of supply than it has been in recent years.
Edit: One point I forgot to add. OPEC meets in September and it is likely traders expect them to increase production then. And when the don't??? Look out, the preverbal excrement will then hit the fan.
Ron Patterson
The traders may be anticipating demand destruction due to the the upheaval in the credit markets.
If that were so then that same expectation would be reflected in the equities market. It quite obviously is not because the market is currently at an all time high.
The stock market reflects what traders expect in the future. They obviously expect all smiles and sunshine for the economy in spite of what is happening in the credit or housing market. They expect oil prices to fall and they expect the economy to continue to boom.
Ron Patterson
Expectations for stocks and bonds don't have to coincide. Investors may be pushing stocks to a new high as they try to get out of the debt markets - out of the frying pan, into the fire (this autumn IMO). They may still be anticipating that credit tightening could reduce the speculative gloss on oil. IMO the oil price will tank, along with most other asset classes across the board, when the markets finally fall.
Gad, how could you possibly be more wrong? Expectations of the stock market and bonds always coincide. People move into the credit market when they expect equities to fall and vice versa. That is the way it always has been and until the market dissolves into chaos, that is the way it always will be.
That is, if investors expect a greater return from bonds than from stocks, the money will move their investments into debt instruments, both of the government and industrial variety. This always happens when people expect the stock market to fall. But if they expect the equities market to keep on booming, they will move from bonds to stocks, causing interest rates to rise as debt instruments must compete with equities for the investment dollar.
That is exactly what is happening right now. Interest rates are rising as they try to compete with the stock market. You might note that existing debt instruments are falling in price. This is because the price of an existing debt instrument must reflect the current interest rate regardless of the interest rate the instrument was issued at. That is if a $1000 bond pays 4%, then that bond must drop in price until that 4% is really 5% if 5% is the current going interest rate. Of course other things must also be considered like the amount of time until redemption date, at which time the bond will be worth exactly $1000, no more, no less. Your local broker will give you the formula for this and I am sure it can be found on line.
All this is covered in Economics 101.
Ron Patterson
Why is the word "investor" used when it's very clear the proper word is "speculator"?
Karlof1, traders in commodities as well as day traders and short term traders in stocks and bonds are usually referred to as speculators. However, by a wide margin, most equities as well as bonds, the buyers and sellers are usually investors. If you have a mutual fund then you are an investor. If you hold a stock or bond for over six months then you are referred to as an investor.
Clearly it is a matter of semantics but by a very large margin, most equities are held by investors and institutions owned by investors. Of course it probably would be better to say "investors and speculators" but if one chooses to use only one word, concerning equities, then investors is the better word.
Ron Patterson
institutions may be long term investors, but shorter term price trends have increasingly been set by hedge funds and (per Bill Cara) HB&B- humongous banks and brokers, i.e., the goldman sachs of the "investment" world. stock margin is at an all time high on the NYSE, yen carry trade is enormous, derivatives growth is exponential, etc, etc, this is the engine of speculation. currently there are so many exponential blowoff stock charts it boggles the mind! the rational mind that inhabits TOD would probably agree that financial markets are and have been in a speculative frenzy. further, if inflation is running around 5% which even the Economist asserted, then longer term u.s. treasuries hold no value currently, particularly given the public statements of weimar ben.
jbunt
karlof - I guess that taking money from under the mattress is speculating!
karlof, i "get" your post. given the current stock market bubble, it would appear that these "investors" are mostly of the greater fool variety.
Ron-
Although I thoroughly enjoy reading your contributions to the threads, I do not believe that your bond vs stock assessment is entirely correct.
There are times when stocks and bonds rally together, as in a time of 'soft landing scenario' expectations (Jun '06- Nov '06). There are times when bonds sell off and stocks rally ('99, '87- through Sept, '07). Here are two graphs, sorry i don't have better examples:
http://charts3.barchart.com/chart.asp?vol=Y&jav=adv&grid=Y&org=stk&sym=T...
http://charts3.barchart.com/chart.asp?vol=Y&jav=adv&grid=Y&org=stk&sym=S...
I also believe that the future of bonds is venturing more into uncharted water as it is in the best interests of our largest trading partners (China, Japan, etc) to recycle dollars back into the 'system' to enable their trade surpluses to continue. I believe that to be the lynchpin in the fragile balance as opposed to the theoretical 'investor' who switches between stocks and bonds.
Also, the market is ruled by funds who largely do not switch between stocks and bonds until the 'investor' redeems, and my experience has been that investors switch to bonds After stocks decline/begin declining.
dVincent, what you say is often true but it is the exception rather than the rule. That is, the market will often move up despite rising interest rates. When this happens there is usually something else, something very bullish moving stocks.
Traders watch interest rates like rabbits watching a hawk. Witness the market everytime the Fed raises or lowers interest rates. When the announcement is made, sudden spikes usually mark his decision.
The stock market just loves low interest rates. This means credit is very easy to get meaning people will be buying houses, cars and all kinds of stuff. But if money gets tight, the housing market drops off, profits drop off and the market will plunge.
But of course all these things take time. In the short run, anything might happen. But in the long run, stocks and interest rates move in opposite directions.
Again, the market can move up in the face of rising interest rates but it does this despite the rising rates and not because of them. And if interest rates continue to rise this will eventually have a devestating effect on the market.
Ron Patteson
jbunt
Well, for every 100 people there are 100 theories. Mine is: If there is no cost for money, i.e., a zero interest rate, you will eventually get deflation. This is because it costs a business zero to borrow and expand. So, overcapacity of all material things occurs. See, e.g., Japan for the last 15 years.
Ron-
I agree, and am afraid rates will continue to rise despite all MSM market gurus that expect rates to fall. We are in the early innings of a structural shift away from high investment flows into financial assets and little into hard assets (rig construction, mine expansion, etc.) The cycle historically continues for over a decade and is accompanied with higher interest rates. This time it is likely to be the end game.
Regarding your comment on the next OPEC meeting (Sept) ... the call has gone out for more crude (IEA) and the backwardation of the oil curve expecting more crude from OPEC, what a meeting that will be!
I was about to post a question to the board and this seems like a reasonable place to put it. I'd like to get peoples opinions on the apparent disconnect between oil prices and the stock market. The DOW just hit 14k, and at the same time oil is up .70 this morning to almost $75. It seems to me that cost has to be absorbed somewhere, either with the consumer or the companies bottom line. So why is the DOW hitting new records with oil so high? Thanks in advance.
Shawnott: Both the Dow and the price of oil will rise in resonse to increased liquidity (M3) and a fall in the value of the US dollar. If the US dollar had kept its strength against the Cdn dollar reached in 2002, oil would be priced at $47. Needless to say, the Dow hasn't set any records when priced in Cdn dollars (or many other currencies).
This yet another piece of the puzzle (big picture) why I think that there will be an large jump/switch in oil pricing sometime soon(=next couple years outside).
Followed by many other ugly things...petro-currency switching, military muscle flexing or worse, recession(s).
The M3/monetary inflation can only do so much before other countries begin to bail. Like Russia and Iran, others will have to follow eventually.
And so the new Rome falls. (Nostradamus anyone)
I think people seem to be forgetting that almost every developing and industrialized country in the world is inflating their money supply. Its not just the US!
Sure enough. And they will all likely pop too.
But the US is a world leader...not to let us all down, they will likely POP first!
:-P
Does this illustrate your point BrianT?
It's kind of hard to see but the blue line is the Canadian Dollar in relation to the US dollar and the red line is the Dow. The Dow returned 2.36% in dividends during this time and a daily interest Canadian bank account did about 3%. So I guess for foreign investors it would have been good to sock your money away in a sleep easy ING account.
Piggly: Nice chart. Interesting that the Dow is exactly where it was 5 years ago (in Cdn dollars).
Brian, I agree.
Ever since Nixon did the "Bretton Woods" thing back in 1974 and got us off the gold standard, we have been able to print however much currency it takes to make everybody's "earnings" numbers look good and keep everyone happy.
What miffs me off quite a bit is that the government considers any numerical increase of my retirement savings to be "income", while failing to recognize the dilution of value of my held dollar due to dilution of its value as a loss.
Here's a quickie chart from Seeking Alpha ...
I guess many may be surprised to find even the Mighty US Dollar is also simple fiat currency, printed at will, to cover obligations.
Unlike oil, there is an infinite supply of dollars. We can print as many as we can spend.
Shawnott, I just heard this explanation of this apparent contradiction on CNBC. As previously oil and stocks moved in opposite directions because of shocks to the supply like Katrena and other things. People feared this would cause shocks to production and delivery of goods. This time it is entirely different. Oil prices are rising because of very strong global demand, caused by very strong global economic growth. Again that is not my explanation but the one I just heard on CNBC.
At any rate the stock market reflects expectations! It does not reflect the current situation except to the extent that the current situation influences future expectations. The price of oil is currently influencing the economy but not to any dramatic extent. People expect oil prices will fall, but not by very much. They obviously expect the stock market to continue to rise. And as noted above, the oil market is in backwardation meaning traders expect oil prices to fall in the future.
Expectations do not necessarily reflect future reality however.
Ron Patterson
Think of the stock market as the floor drain in a slaughterhouse. The blood comes from an ever increasing supply of cattle (money). The fed has quit posting the M3, the primary indicator of money supply, because they are printing money as fast as they can. This money has to go somewhere. I can tell you that is no longer going to the housing bubble. It has never gone to the people who actually need it, the poor and lower middle class or even the middle class. It goes to the rich. The rich are already rich, but they are greedy monkeys and they will never turn down practically free cash. So, they park their money in the stock market.
Meanwhile, the plunge protection team, using Uncle Sam's printing presses buys up the market whenever it looks like it is about to tank. For a prime example, look at GM. It is essentially bankrupt, yet its stock continues to hold and even rise. This constant infusion of cash into the hands of the rich is exactly what is levitating the markets.
We essentially have a Zombie Market. It is the undead market. How long can this last? As long as people continue to believe that the US government gives a rat's ass about the people. As long as the rest of the world will let the US get away with it. (there are signs that the rest of the world has had it with supporting the US's free ride. Once the oil producing countries decide to quit accepting the dollar, you will see the value of the dollar collapse.) When this happens, all the funny money in the stock market will flee en masse to countries with stable currencies (if there are any). Of course, these countries will demand far more dollars than they would yen or other currencies to buy equivalent stocks, bonds and currencies. It will be pretty much like Weimar Germany's hyperinflation with dirt poor millionaires buying loaves of bread with wheel barrows filled with cash.
If we had not shipped most of our major industry overseas in a fit of greed and stupidity, we might be able to recover in a relatively short time. But, we cannot time travel and kill off the moronic, greed-head traitors who saw fit to gut the heart of America. We are stuck with their evil works. When we can no longer afford to buy our cheap crap, haute couture, common tools, shoes, medical equipment and everything else necessary for life from China, we will find ourselves scrounging for clothes, food, shoes, shelter, and clean water. We will end up like so many people living on the fringes of capitalist society, like people in Manila and Guatemala City. We will be digging through our garbage heaps looking for a pair of shoes, for clothing, for anything still viable and we will starve.
So, to continue the image from above. The blood swirling down the drain is the life's blood of our country. It is your future, your children's future and their children's children's children's future. It will mean the effective destruction of the US.
There are rough times ahead. The neocons on the site will pop a vein about what I've just said because they are the cause of this coming misery and they are just beginning to realize it at a basic level. Some of those cretins will do the right thing and grab their right to bear arms luger and blow their brains out. Others will see it as an opportunity to profit from our destruction. And the vast majority of them will continue to believe their own BS because they had to be awfully stupid to believe the claptrap to begin with. And they will fight to the death to preserve the right of the rich to ruin our country, rape our environment, and enrich themselves at the expense of the hoi polloi.
The blood swirls counter-clockwise and we keep standing knee deep in our own blood.
And why do you believe, that only USA is going to tank? Why should For example Europe manage it so much better?
You may want to notice my parenthetical remark about stable currencies. (if there are any)
Yes, there could be global meltdown. I can hardly see that as a good thing or even a different thing as far as the US's collapse is concerned.
I suspect that the US will be the first to fall. If others fall as well, ho hum. Welcome to the club.
Or, as Vonnegut says, so it goes.
The US first? I'm not so sure. The dollar is not available for carrying at 0.5%. If Japan would raise its interest rates, which it will have to at some point, the Yen would be dead in the water, the carry traders would be forced to jumo ship real fast. That's a mighty fine conundrum in Tokyo. Dead if you do, deceasad if you don't.
I'm guessing the blast will start in Asia. Could be Japan, or Shanghai, or even somewhere smaller like Thailand, rippling through to bigger markets.
There is a huge speculative bubble in China at the moment too.
But as for Japan, why would they do this? If they destroy the yen then the dollar falls anyway if this theory is correct because once the yen collapses there will be no global flow of liquidity anyway.
Ghawar Is Dying as we slide Into the Grey Zone
"The greatest shortcoming of the human race is our inability to understand the exponential function.
Your argument correctly implies that it is Japan and China that have the option to make the call as they hold enormous U$S reserves. This is the relevant point.
The US has no option.
Well it has the option to do the right thing and massively raise interest rates, but there isn't anyone with the ballz to do it. The medicine is too bitter.
I suspect that China will attempt to maintain BAU until after next year's Olympic Games in Beijing. The games are of huge financial, cultural and "prestige" importance to the Chinese authorities, and are likely to be the last "Great Games" of the modern Olympiad. London in 2012 might not even get to the starting blocks. Although it might well be better for China to pull the plug now on the US bankruptcy, I believe they will try "save face" for another year, and then let the crash happen. Just one more "above ground" situation to add to the mix.
I am not at all convinced that China wants to "pull the plug" on the US. Like a dealer, China has no incentive to stop supplying his addict. He just has to make sure that he doesn't hold the paper from the addict too long. And more to the point, China has found an outlet for dollars - Africa, used to buy real physical resources and access to resources. It's the foolish tinpot dictators of Africa who think they are getting rich (and they are at the moment). Of course even a few of them are not stupid and are reinvesting those dollars in military hardware or other physical goods. But the vast bulk of Africanized dollars end up in Swiss bank accounts where they will eventually be worthless. And that's good for the US too. While the US tries to keep the velocity of money high amongst consumers, there could be an argument made that a certain subset of the dollars of the world are better off at rest because then they represent no threat to anyone.
My point is that human greed is incredibly inventive and that the existing financial system is more likely to mutate and survive than automatically collapse right away. I don't think the existing financial system will survive ultimately but it's going to take a few decades to take it all apart, barring anything short of a full scale thermonuclear war.
Like I've said before, while many of you are looking for the dollar collapse, I think there is still a reasonable probability of at least one more credit bubble. And I personally believe the next one is in carbon credits because they are so poorly understood, because the market is so new, both of which mean the carbon credit market will be wide open to abuse and manipulation.
Ghawar Is Dying as we slide Into the Grey Zone
"The greatest shortcoming of the human race is our inability to understand the exponential function.
Hi Grey,
I like your reasoning here - about the "resting dollars".
1) re: "Of course even a few of them are not stupid and are reinvesting those dollars in military hardware or other physical goods."
I just have to add "ouch" on the military hardware. I see it as something that doesn't rise to the level of the word "investment", let alone "not stupid".
2) "But the vast bulk of Africanized dollars end up in Swiss bank accounts where they will eventually be worthless. And that's good for the US too. While the US tries to keep the velocity of money high amongst consumers, there could be an argument made that a certain subset of the dollars of the world are better off at rest because then they represent no threat to anyone."
"Better" - yes. (A welcome smile.) May they rest long, esp. if they can't be used for organic agriculture conversion, putting in place the legal rights of women and children, etc.
3) Which brings to mind a funny (odd) thing. It's tragic, really, the different kinds of "threat" and how they interact with each other.
Where something threatens someone's self-image, and the defense against that threat - which is essentially a non-material threat to an intangible construct - ends up having the result of the injury or death of another, for example.
Pride hurt, pick up the gun kind of thing.
Because here in Europe we have what are called politicians.
They are people who have not starred in movies, or have IQ's lower than 50 and generally don't believe in god:-)
Right,. let's see here.
Blair, Chirac, Prodi, Merkel, Berlusconi, Schröder, Sarkozy, Balkenende, you'd trust them all to babysit your first-born, and not sell her off to the highest bidder.
Huh! Eh! I don´t know what to say. Better lieve it without any more comments.
Yep. you win.!
But...I would trust Alex Salmond . Come on the Scots!!! SNP have even got a bit about peak oil on their webiste (well, used to). We talk a mean game and we've fire in our kilts. (Hey i'm scots Italian!)
Our UK politicians can debate we'll. Black is white. I've seen it first hand. These guys are too prude/classy for any hollwood showman shit.
What am I talking about?
Oh yes Oil. Norht sea. Oh bugger.
Marco.
And don't dare forget our kinsmen George Galloway and Tommy Sherradin. These guys have made our court's witch hunters look like absolute fools. I would love to see a debate between these guys and Bush.
Bush"hey guys who runs Scotland these days"
Tommy:"The McDonalds ye fuc**n'i ejit"
Bush: "Great burgers"
Galloway:"Fascist imperiast pigs that company. But..The've started running thier fleet on the oil from the chip pans. Oil for food"
Tommy: " Aye, Galloway. Oil for food. That rings a bell.
Bush:"Say Galloway, you sure made our court jesters look good in that oil for food trial thing.
George Galloway:"I was tryting to rebuid Iraq and look what you did"
Bush: "Yeah our embassy is 110 acres. "
Tommy: "Ye'll drown in yer own blood nazi B***stard."
if your (european) politicians dont believe in god, they are a whole lot smarter than typical american politicians.
bush draws a majority of his support from neocon jews, uncle tom blacks and hispanics, toothless rednecks and clueless bible believers.
This is a good discussion and basically, I think other powerhouse countries (Russia, China, India, even Western Europe) are playing chicken with the US. "If you guys are going to print more money, then so will we." To keep the system running, all players have to play along and create credit and wealth out of thin air. This could go on a long time until someone flinches and calls in the cards to see what hand is being held by the other players.
If everyone plays nice and keeps the game going, then we may see no economic collapse of the big guns even in the face of very high crude prices. The smaller players will suffer and already are, but they are outliers when analyzing the wealth of the world (in the eyes of the big players...not me).
So far, I think BushCo has convinced the likes of Russia, China, and India to stay in the game, but we have seen some cracks in the loyalty of the players to the game under BushCo rules. You can bet alternative plans have been mapped out under the radar on how to move away from US economic dominance. I believe these alternative plans will materialize way before massive crude production declines become widely apparent outside our little community.