2/21/2013 3:15 AM ET|
Gas below $4, or Dow 14,000?
Central banks have fueled the markets with cheap money, but that means inflation -- and rising prices at the pump. The problem? For most of us, the gain isn't worth the pain.
We are in uncharted territory. And no, I'm not talking about a world in which "American Idol" no longer reigns supreme on the airwaves.
I'm talking about the fact that we're in our sixth calendar year of near-0% interest rates, with the Fed engaged in its fifth iteration of direct bond buying with an open-ended commitment to purchase $85 billion a month. I'm talking about the way the Japanese, who tend to lead the way on these things, are now talking about extreme forms of monetary-policy easing, unleashing fears of a global currency war.
I'm talking about easy money reigning supreme everywhere.
What has all this monetary malfeasance bought us? Sure, the Dow Jones Industrial Average ($INDU) 14,000. But we're also looking at shrinking returns from all this economic stimulation as rising prices pinch beleaguered consumers. Policymakers have a choice: They can use cheap money to keep the Dow pushing above 14,000, or they can have gas below $4 a gallon.
You can't have both for long, because cheap money means pricey gasoline, and the economy doesn't run well on premium. Here's why this choice is so critical.
Two roads diverge
The reason the Dow has surged is simple enough. As governments, companies and families try to get out of debt and control spending, policymakers are trying to keep the global economy moving. The effect is a stock market bubble.
It's a bubble not supported by the fundamentals. We've got an unemployment rate tracking back toward 8%, negative growth in the U.S. for the fourth quarter of 2012, new recessions in most of the rich-world economies and soaring government debt levels.
And now, gas prices have surged to new seasonal highs. Gas is pushing over $4 a gallon in much of the country and is already above $5 in California, and seasonality should push prices even higher.
While gas prices are only one of the many economic troubles we face -- add stagnant wages, record food stamp usage, depressed consumer sentiment, higher taxes and more – they're critical. Because, as we saw during similar energy price spikes in 2011 and 2012, the economy suffers when gas costs more than $4 a gallon, and so do stocks.
What central bankers are trying to do
I must admit, the central bankers and the politicians supporting them talk a good game. They say they are concerned about asset bubbles and financial instability. They say that if inflation gets out of control, they'll pull back.
Japan's new prime minister, Shinzo Abe, who set off talk about currency wars by aggressively pushing down the price of the Japanese yen by pressing for a higher inflation target out of the Bank of Japan, said over the weekend that policymakers must be vigilant against asset bubbles.
But he followed by saying the positive effects of monetary policy easing -- cheaper money -- include higher stock prices.
He added that if Japan doesn't get the results it's looking for, other unprecedented options might include the Bank of Japan printing yen and purchasing foreign bonds (such as U.S. Treasury debt) or using the money to directly affect the stock market. Both strategies would be designed to lower the value of the yen.
And if the Bank of Japan, which, like the Federal Reserve, is an institution largely independent of political influence, doesn't play along, Abe suggested it might lose that independence.
This is political meddling in currencies and interest rates on a scale not seen since the U.S. Federal Reserve separated from the Treasury in 1951.
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All you needed to write was, "We're Screwed."
Supposedly, oil at $90 and above drags on the economy or $118 for Brent. Seemingly, the optimum for W TX is around $80. That being the price at which shale plays are booming and generating cash flow to fund drilling without taking on a lot of debt without dragging down the economy.. Drilling starts to decline at or below $70 in shale plays.
Although the focus is on gas prices because we see it on every corner and buy it frequently, by products, rubber, plastics, synthetics, glass, paint, cosmetics, chemicals drugs etc all experience price increases as petroleum derivatives. Together with gasoline, diesel, kerosene, all these combine to have a significant effect, in a negative way.
It will be interesting to see leading economic indicators if high prices for petroleum products persist for a quarter or longer. I am sure it will be Bushs fault. Interesting the mainstream media is giving Obama a pass on this when they just howled about Bush and Cheney when gas prices went up.
Bennie B is Busting his B^lls because yer' Boys in Washington ain't got a clue.
I drive 125 miles a day, roundly trippin' to the shop and back, and I'm paying $4.35 per Gal. as of this A.M. (@ ~35 mpg)
I'm outta equities; got a good part of the run back up, but this is crazy!
My wife and I are running savings for parents in our Roths; they were gettin' squeezed bad. I don't have to tell conservative savers what's up with ZIRP. It hurts!
Bennie's gotta roll out of the throttle here. Hold ZIRP a bit longer, but end the funny money.
Seems USA is going to financial h3ll either way: debt or (non-core; ha ha, my ^$$) inflation...
All the best.
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