2/21/2013 3:15 AM ET|
Gas below $4, or Dow 14,000?
Problem: It's not working anymore
The main beneficiaries of all the cheap money sloshing around have been financial markets, banks and politicians. According to Bank of America Merrill Lynch, global financial stress has fallen to a post-recession low over the past few weeks as stocks have posted their best, low-volatility rally in decades. Financial stocks like Goldman Sachs (GS) have been marching higher on a perfect, unblemished 45-degree uptrend.
Yes, average folks have seen some benefit, too. Americans' saw their wealth in 401k and other investments grow as the Standard and Poor's 500 Index ($INX) rose to 3.8% over its September 2012 high. That's good but not great.
And definitely not worth the problems I believe this is causing.
By keeping Treasury bond yields in negative inflation-adjusted territory, the Fed has reduced borrowing costs. That has eased the pressure on Washington to address its unsustainable fiscal path -- just as low rates have allowed Tokyo to gorge on debt, accumulating a government-debt-to-GDP ratio approaching 230%, which is more than twice the rich-world average.
And as the risks are rising, the positive wealth effects are diminishing, according to research by Credit Suisse economists. What they found is that central bankers and their allies are taking more risk, with potentially disastrous consequences for the global financial system, in exchange for less and less wealth benefit.
They also found that since the 2007-2008 financial crisis, the positive economic effects of higher prices for assets like stocks and houses have shrunk. Sensitivity to housing wealth -- or how likely it is that an increase in housing wealth will encourage new consumer spending -- has fallen roughly 35%, while sensitivity to stock market wealth has fallen 27%.
The result helps explain why consumer spending growth has been so modest in this recovery even though the S&P 500 is up 139% from its 2009 low.
The drag is likely being driven by a few things. One is that nearly one-third of mortgages are still "underwater" -- so any price gains now will be viewed only as cutting losses. It's not like back in the 2006 go-go days, when people used the equity in their homes as ATMs.
As for stocks, the S&P 500 has merely returned to its 2007 highs -- levels first reached back in 2000. That doesn't feel like a gain.
Plus, the quirks of human emotion doomed the Fed's efforts from the start. People are much more sensitive to falling home prices and falling stock prices than they are to gains. In other words, declines in wealth have a bigger impact on consumption than increases do. Plus, the wounds from recent losses are still raw.
On the flip side, the work of James Hamilton, an economics professor at the University of California, San Diego, suggests that people are more sensitive to oil prices on the way up than on the way down. And we all know that gas stations raise prices a lot faster than they lower them.
In short, gas going over $4 hurts more than Dow 14,000 feels good.
The path not taken
So after they quelled the panic in 2008 and 2009, central bankers should've stepped back, swallowed their pride, and admitted they had done all they could. We don't have a lack of liquidity. Taking the U.S. monetary base, the most basic measure of the money supply, from $800 billion before the financial crisis to more than $3 trillion now was overkill.
If you take one thing away from this, Federal Reserve historian and Carnegie Mellon economist Allan Meltzer suggests you consider the chart below. It compares consumer sentiment (the blue line) to the massive accumulation of the Fed's cheap money in bank vaults in the form of excess reserves (red line). Before all this started, the banks didn't have a need for extra money sitting idle. Thus, excess reserves were consistently low.
After the past few years, as the Fed and other central banks pump and pump, banks are essentially drowning in the money. They can't find enough high-quality loan opportunities, and loan demand has been tepid, so they are essentially shoving the money under their mattresses, so to speak, by increasing their excess reserves.
And yet, all this enthusiastic money printing and its effect on the stock market have barely budged consumer sentiment. And consumer spending fuels our economy.
Based on those Wal-Mart emails, and considering the other head winds we face in the weeks to come, I expect the blue line to fall away again as consumers retrench and cut spending.
All because Federal Reserve Chairman Ben Bernanke and the handful of souls who control the Fed (and their foreign counterparts) have decided that Dow 14,000 is more important than keeping gas below $4 a gallon.
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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.
Time has come now and the Fed is in the Red, time to recoup and the market ain't gonna like it.
If you don't believe the seventies are back ,take a look and see what happens when you have cheap money too long, history unfortunately has a tendency to repeat itself. Not enough seem to learn from it.
Better get cash heavy or be a good rider on the way down. The time is nigh.
Instead of gun control laws how about putting some laws on these "players" thats flushing the 3/4 of the populations economy down the crapper while they pad they're retirement. Their philosophy is screw everyone and everything and take as much as you can.
OBAMA AND DEMOCRATS AND THEIR FING GREEN AGENDA HAS CAUSED THE HIGH ENERGY AND FOOD PRICES AND IF YOU
BIG DOPE LIBERAL OBAMANITES KEEP THINKING IT'S BIG OIL YOU ARE FING DOPES! HE PROMISED THIS 'CHANGE' AND HE'S
MAKING SURE ENERGY AND FOOD PRICES SKYROCKET TO PUSH HIS FAILED GREEN AGENDA! THAT'S FACT! OBAMACARE
IS ALREADY BROKE! THEY AREN'T TAKING APPLICATIONS FOR THOSE WITH NO INSURANCE OR PRE EXISTING CONDITIONS
CAUSE THE PROGRAM IS BROKE!!!! AND IT'S NOT EVEN UP AND RUNNING YET! YEAH OBAMACARE WILL BE GREAT! YEAH
OBAMA AND LEFT WING LIBERALS HAVE ALL THE ANSWERS! RAISE TAXES KEEP SPENDNING MONEY YOU DON'T HAVE GIVE
MORE FREEBIES TO LAZY ASSES AND ILLEGALS WHO WANT TO LIVE FREE ON THE HARD WORKING MIDDLE CLASS! YEAH
THAT'S A REAL GREAT PLAN! SOCIALISM HAS FAILED EVERYWHERE AND IT'S NOW TAKING DOWN AMERICA!
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.
Anyone that believes refiners will push capacity to the max in the name of providing cheap gas to consumers simply doesnt understand their business. I saw a news pundit, Charles gibson, try to get a refinery manager concede that for the good of the country he should push daily production to the point there woudnt be enough profit to do necessary maintainence but Gibson ignored his point because his agenda was to vilify theindustry as evil predators.
I grew up in the oil industy and most of my family was involved as service providers to the industry and worked in it all my adult life. While I dont know everything about it, I know a lot more than most. Media and the gas pump shape public perception which is mostly hype, lies or mis information. To imply as politicians often do and media, that drilling a well in 5000 ft of water is the same as an onshore well is ludicrous or that the required seismic and geology analysis required prior to seecting a drilling location is absurd.
Ignorance is the best friend of those trying to conjure up elaborate conspirarcies. Believe me, if oil companies could collude to gouge and manipulate prices, while not entirely innoncent , nat gas would have NEVER dropped below $7-$8 range.
Currently gasoline prices are about what they were in the 1930s adjusted for inflation-a miracle.
In europe it can be over $9/gal
"So what else is new" screams the crowd. Eventually we will get a period of inflation that will look the last one look like nothing. We will look back on $4 gas with nostalgia, just as I look back at the $0.30 per gallon price of my youth. All of us who scrimped and saved are being taken for fools, while you profligate spenders who are running up big debts will be able to pay them off with inflated bucks. The only consolation I have, is that I know how to get by on very little, and you don't.
In a just universe, Bernanke and his ilk would be tarred and feathered and sent to live under a bridge. In this universe, he will spend his declining years traveling about and giving lectures for big money.
Old Chinese Proverb: He who cannot live on a little, is forever a slave.
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This is not a surprising view from one of the Fed's recognized hawks, but in a low-volume market it was enough to create a little shock ... More
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