A Crude Conundrum
by Rob Kirby, Kirby Analytics. December 24, 2007
Over the past few weeks much has been written about the Bernanke led Federal Reserve and whether or not the Fed has been "ahead" of the game where monetary stimulus is concerned in an economy that is showing increasing signs of systemic stress.
I have even read articles claiming that money growth has in fact been stagnant for much of this year – from market analysts such as John Hussman - arguing that the Fed is perhaps "behind the curve" and generally only injects money into the system on a "temporary" [repo] basis:
"So it's difficult to understand why investors would get all excited about the Fed temporarily buying up a few billion in government securities, when we've got a Federal government that's simultaneously and permanently issuing and then constantly rolling over many, many times that amount. It's an escape into dreamland to believe that Fed actions have any chance at all of providing more 'liquidity' when the Federal government's deficits suck up in a matter of weeks every bit of liquidity that the Fed has provided in a year. These Fed actions are nothing but marginal tinkering around the edges of the global financial system, and investors are starting to catch on."
For a minute now, let's just put "what the Fed does" aside.
Instead of viewing money creation from a "temporary-Fed-can-do" perspective, I'd like everyone to consider money creation from an oil centric perspective:
If we discount recent developments in Iran whereby Iran now settles their trade in crude oil in currency other than dollars; we can empirically see that a rising crude oil price is in fact synonymous with U.S. Dollar support and fiat money creation. Remember folks, 4.25 billion in "newly discovered fiat per day" amounts to an annual run rate of 1.551 Trillion in incremental "new" money growth versus two years ago.
Amazing how this "new money" being created amounts to [more or less] roughly the same stipend required to fund a war in the Middle East and America's burgeoning trade deficit.
It must be a coincidence, ehh?
Overseas equities were in good holiday spirits with Japan's Nikkei Index ahead by 225 to 15,257. North American markets also rejoiced with the DOW up 98.7 to 13,549.30, the NASDAQ advancing 21.51 to 2,713.50 and the S & P gaining 12.00 to 1,496.45. NYMEX crude oil futures added .76 to finish up at 94.07 per barrel.
Interest rates were little changed with the 5 yr. bond ending the day at 3.64 % and the 10 yr. finishing at 4.24 %.
On foreign exchange markets the U.S. Dollar Index fell .06 to 77.59.
Precious metals ended the day the day mixed with COMEX gold futures ahead .50 to 813.00 while COMEX silver futures added .18 to 14.57. The XAU Index gained .99 to 168.95 while the HUI lost 1.82 to 396.73.
On tap for tomorrow is Christmas! Have a good-one!
© 2007 Rob Kirby