Among the many hazards of the Fed’s new toy quantitative easing is the flow of discretionary investment funds into assets forming bubbles. This is far from being the only hazard, the flow of dollars into foreign exchange amplifying inflation overseas, the flow of funds into junk bonds and other, similar high- risk assets, repricing risk inappropriately, creating ‘sheet’ imbalances that cannot be unwound and so on.
This is the daily chart of the December, 2010 NyMex Crude contract from TFC Charts Dot Com. The QE program has signaled speculators that cheap, Fed credit is available to manage risks. Bernanke has given the oil bull a new lease on life.
What the iconoclasts @ the FRB seem not to understand is that high oil prices are economically self- limiting. Unlike many other asset classes, oil price increases destroy demand for oil. The Dow @ the 36,000 price level is not reflected in goods bought and sold. Goods do not embed stock market values.
Oil is embedded in virtually all goods and services in the developed and developing world, including food, water, electricity, and labor. The US commercial infrastructure has been built around the calculus of sub- $35 oil as the primary input. Oil priced at current levels is unaffordable.
If the bull market carries forward the inevitable outcome will be a price- driven crash of the real economy as has happened every time oil bull markets price crude out of reach. The next couple of weeks will be critical as oil priced above $100 will be a signal for more speculative cash inflows and the speculation dynamic within the futures markets takes on a form of its own.
Keep in mind the annual price average for crude in 2008 – the year of the Great Oil Spike – was $97 per barrel. This price was unsupportable even with the stock market at nominal highs and a world economy flooded with credit marked to fantasy. In today’s credit constrained world the 2008 price may be unreachable. Time will tell, but the danger is real.
Time to turn the ‘Bat Signal’ on …
Meanwhile, one of the interesting features of previous liquidity programs has been in inverse correlation between liquidity and unemployment. This was first noticed by economist Steve Keen last year and has been followed here since. This was Professor Keen’s original chart showing the correlation during various money injection episodes during the Great Depression:
What we need to do is watch M0 or base money by way of John William’s ‘Shadow Government Statistics’:
Here’s Bill McBride @ Calculated Risk:
The DOL reports on weekly unemployment insurance claims:
In the week ending Oct. 30, the advance figure for seasonally adjusted initial claims was 457,000, an increase of 20,000 from the previous week’s revised figure of 437,000. The 4-week moving average was 456,000, an increase of 2,000 from the previous week’s revised average of 454,000.
This graph shows the 4-week moving average of weekly claims since January 2000.
The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased this week by 2,000 to 456,000.
It looks like unemployment is streaking so we need to keep an eye on this. It would be ironic if Fed easing designed to stimulate more jobs stimulates unemployment instead.
Meanwhile, the New Guys – the new suckers, the new fall guys – cannot arrive in Washington, DC fast enough to suit me. Better to have some ‘new meat’ to collect the blame for the ongoing downturn rather than the usual suspects; liberals, bloggers, deflationists and Democrats. While each and every Palinista newbie has the rather golden opportunity to add some much- needed accountability to the US establishment, it’s far more likely there will be six feet of snow in Honolulu first.
What the ultra- reactionaries don’t understand they have almost zero effect on outcomes which are now driven be forces outside our collective control. They can stand by the door while John Michael Greer’s salvage society takes hold. That is, they can watch as their patrons in finance strip away what is left that isn’t bolted to the floor.
That is a best- case scenario. More likely is the newbies will trigger the next leg of the ongoing crisis they were putatively hired to ameliorate.
The problem is ideological inflexibility. The Tea Party believes — that’s it! The Tea Party ignores the effects of fuel and other input constraints and focuses on partisan politics as the cause of the unraveling. Being ignorant they leave the real problems to accelerate while hoping the old Reagan/Gingrich tactics of denial and papering over with debt will work as they have done in the past.
With Obama as the Tea Party target, the most likely policy outcome will be intransigence particularly as the debt ceiling has to be ‘negotiated’ upward early next year. This is the point where the Niewe Republicans will seek to make a name for themselves @ the expense of Obama and shut down the government.
Of course, the Faithful Fed will step in and happily monetize any Treasury debt maturing during this period so as to avoid a technical default. Nevertheless, the effect on confidence will be severe. It will be clear that the US government in its hour(s) of need is held hostage by morons. The cost of Treasury risk will be reexamined. The Fed stance along with the Treasury department’s – is that interest on government debt must and will remain @ zero percent indefinitely. This is the purpose of QE, to support the near- zero rates.
Unfortunately, the Fed does not control its own destiny or that of the country, rather it is in the hands of a small number of nincompoops. The bond market will ignore the mechanics of Planet Bernanke’s ZIRP programs and instead zoom in on and price ‘Nincompoop Risk’. A flight out of Treasuries will be the consequence.
By the way, what happened to the Treasury department, Chapter 11? Vacation? Exile? It’s Fed, Fed, Fed and more Fed. Planet Bernanke is single- handedly running US government finances. Who elected this dude?
Let’s see how this horse race turns out; High Oil Prices in post position one and favored to win, Streaking Unemployment is the second gate and Policy Run Amok leading to a government shutdown and default is in gate three. The other positions are held by China Hyperinflation, Trade And Currency Warz, Greek Credit Crisis, Japanese Demographics, Bank Failures due to onrunning mortgage finance woes and the last gate is Black Swan.
We don’t know what Black Swan looks like but he is always a contender …