Thursday, February 23, 2012

It's a funny game of chicken.

I had to talk about gas prices again. Not because I have to pay more, but because I am shocked at how complacent people are being about the rise in price.

Yesterday I talked to someone I'd known for a really long time who has been dreaming about buying a 50 thousand dollar truck. This is a guy who lost his house in the first phase of the housing market shake out. I guess he must be a good credit risk now.

He'd been talking about it for a while now, so yesterday I cornered him. Are you still going to buy that truck with gas prices this high - I asked. Prices go up, and prices go down - he said.

Now, while this is a true statement, there are a lot of thing going on geopolitically that can make the distance from high and low prices quite long. I did find it interesting how he felt the high prices would be quite transitory. For the record, I also believe this - but for different reasons.

Why are gas prices so high? It isn't because we are using a lot of oil. All month I have been shocked at the rise in price because stockpiles have been rising almost all year. Just look through google. Most weeks have clocked a stockpile rise.

So, maybe the economy is doing much better than I think. Maybe. I would expect if that were true, the volume in the stock market wouldn't be so paltry. Most of the traders don't seem to leave until the "sell in May go away" point. Even for summer trading, the market is pretty dead. If the economy was indeed that much better, traders would be the first in line to capitalise on that. And really - if the rise in oil is due to an improving economy, hold onto your hat - because some of that money we have been printing will enter the stream and cause inflation. Yes, eventually it will come. I just doubt it is now.

Let's move on to the speculators.

When I hear traders say "5 dollar gas, 7 dollar gas, people still have to drive to work" - it makes me laugh. I will always believe that 4.50 a gallon gas tipped us into recession. To be sure - we were a very over extended economy. Which is why gas prices made such a difference. I continue to believe we will never see 5.00 a gallon gas. Every time gas passes 4 bucks a gallon, people pull back on everything. Except driving to work of course. Traders can be right-ish.

And anyway, you can't really blame the traders when our administration is stirring the pot. I personally never believe in sanctions, but, they apparently are making Iran quite agitated. If it can be believed, our sanctions collapsed the Iranian currency. Some say by 80%, others by only 50%. Read the The Stunning Collapse Of Iran's Currency.

"The collapse of a currency is typically a well-publicized event that reverberates throughout the world's equity markets. The domino-like capitulation of East Asian currencies in 1997, for example, sent equity markets hurtling downward, leading to one of the largest single-day drops in the Dow Jones Industrial Index in history. And the 1998 devaluation of the Russian ruble triggered the demise of hedge fund Long-Term Capital Management, immortalized by Roger Lowenstein in When Genius Failed.

Yet this didn't happen when the Iranian rial collapsed at the beginning of this year. And the question is why? National Security Advisor Thomas Donilon shed a slender ray of light on this question in an interview with Charlie Rose last week. In it, Donilon tacitly implied that the collapse was anything but a mistake. And this would make sense, of course, as the United States is currently using economic measures to pressure the Iranian regime to abandon its nuclear program."

Iran has even threatened to execute currency speculators. Here.

I don't know why all of a sudden Iran is a big threat, but Isreal is making a lot of noise. Probably because Iran parked a couple of military ships off the coast of Syria. Iran Moved Warplanes to Protect Nuclear Sites before the inspectors tried to come in. Which is funny, because I haven't heard of the inspectors trying to get in the whole time Obama has been in office. Now all of a sudden they want to get in to inspect?

I honestly suspect this whole thing is more about Syria than it is about Iran. When gas prices started creeping up, I thought it was directly because of Syria. The Asad government has bombed oil pipelines twice since the beginning of the year. Disrupting a pipeline anywhere - will spike oil prices temporarily.

So, why wouldn't the speculators run wild? Our administration isn't going to do anything. Presumably they think this will invigorate their very troubled green energy sector. I think it will crater the economy before that happens.


  1. The geopolitical issues are just a red herring, the bottom line is that inflation is real, here and is our new future. I bet we see $6 gas in SF sometime this year. You can either get ahead of it or get buried by it.

    PMB spent too much money for everything not to be more expensive. Unless you believe that the govt will magically stop spending money, there's no dodging this bullet.

    According to the government, we spent $454 billion in interest expense alone on the national debt last year. Income tax receipts were 1.8 trillion. To put this into perspective, if the government were to apply for a mortgage loan, they would barely meet the cutoff threshold for debt to income.

    No big deal though, we'd get approved for housing, except if you look at the average interest we were paying last year it was under 3%. Unlike most borrowers, this is floating not fixed.

    With deficits going out for years and politicians not willing to accept political sacrifices, there is no way that they can contain this monster now that it's so big. If rates go up to just 4%, it means our interest expense goes to over $600 billion and 40% of all income tax goes just to the interest.

    If traders get really worried and stop buying treasuries, then that will only put pressure on rates to move higher. Italy broke down at 7%, how would US citizens react if taxes doubled in order to pay for past sins? The only reason why they are spiking oil instead of selling treasuries is that everyone is still scared of the bank runs. The treasuries represent a form of protection against that and until long term fears overcome short term ones, the US will be able to keep spending and spending and spending, accelerating this twisted cycle that we're about to live through.

    On a different note, I paid $2.43 a gallon for natural gas this morning. (compared to 2.60 last summer) Given the gas prices, it's probably not too much of a surprise to see a Honda green dealership opening up right next to my station.

  2. I was hoping you would comment!

    I am completely in your camp on the inflation front. I believe it to be an intensely real threat. A few years ago I would have thought we would already be in severe pain because of it.

    The only thing that makes me take a more measured approach is Japan. How can Japan print so much money and not have inflation? And if they can do it - why can't we? I know it means the economy can never improve due to the crushing inflation it would cause.

    I can only presume they can do this because once the money is printed - it is absorbed by the banks and doesn't get put into circulation. Which is what I am assuming is happening now. Only magnified because of capitol requirements. The banks are just soaking up all that money and parking it.

    Believe me - every day I wake up and try to decide it we are heading towards inflation or temporary hyper deflation. Two different modes of survival. Significant inflation just hasn't occurred yet, and it's perplexing. I believe inflation is like a freight train. Once you see it - it's already too late. And since it hasn't racheted up that much -money must not be making it into circulation.

    Interesting comment about the trade off of treasuries vs. oil prices though.

    I am not surprised about the natgas. I have been watching that every since you commented about it. It is causing people to rip out their heating oil and converting their houses to natgas for heat because of the price collapse. Why aren't people adopting those cars more readily? Is it price? I don't get it. Are there just not enough filling stations?

  3. Natural gas hasn't really been adopted for a lot of reasons. The biggest is probably because up until fracking took off, it's price seemed to be in sync with oil. Now that the fracking is here, there's a race to get at as much gas as possible as soon as possible because everyone knows that there is a glut coming, so you're highly incentivized to sell as much as you can today at the higher prices, even though that only further floods the market.

    From the governments perspective, tapping into these resources keeps people from freezing to death and serves as an alternative to oil in the short run. Since cheap natural gas can also help to further disguise the inflation that they claim doesn't exist, you can bet we'll see a whole new round of subsidies to the CNG and solar friends of the government, now that oil prices are reflecting the US Dollar's real future.

    Higher oil means more corn will get diverted to ethanol, which means grain prices move higher. Last year, prices on meat fell because ranchers culled their herds en mass because they couldn't afford the grain. With smaller livestock populations this year and higher grain prices again, I suspect that meat goes up this time because there's only so much minimizing you can do and still earn a living off a herd.

    If you really want to check the nation's pulse when it comes to inflation, you have to ignore the CPI and instead pay attention to the livestock auctions in Fresno. Just wait, in 6 months $80 for a heifer will look like a bargain. These higher prices will only be magnified as they trickle through the government mandated processing plants, the wholesale middlemen, and ultimately the grocery stores themselves.

    As long as the cattle/grain/oil/commodity/non-currency alternatives prices keep moving up, you'll see risk stay on and the stock market also participate in the inflation. When they go down, a month later we'll see risk off come back as these sorts of data points get more widely reported in the proper government sanitized reports that claim inflation doesn't exist because people can always substitute the price of a hot dog for the price of a steak when cattle prices rise.

  4. Thanks for the link. I will keep an eye on that. Although it's hard to tell what is monetary inflation with cattle futures, and what is weather related inflation. For a couple of years it will be weather related because of the drought in Texas last year, and the drought this year in California.

    I am not saying there is no inflation. Just for the record. I am just not as excited about it - yet. I still believe things could go either way. And the downside risk IMO is still larger than the upside. You can only scream inflation for so many years, until... well I don't know.

    I won't become super excited about it until it reaches GWB level. Which was roughly 4%. Although I am extremely concerned.

    I know I am completely on the opposite side of conventional thinking (everyone says I'm wrong) - but I find it really hard to believe that we will get 5 bucks a gallon, when at our richest, strongest point - 4.50 took down consumers. Wages haven't gone up. Jobs haven't increased. I'm saying everyone is playing rabbit. Pretending like they aren't sick.

    The rise has just been so fast, consumers haven't reacted - yet.