From Bad to Worse in a Big Way

Just when it appeared that a $50 per barrel floor had been put under the price of oil, something unexpected happened.  The price of oil dropped over 2 percent to about $48.74 a barrel.  What’s more, it could fall much, much further…

“A rally in crude-oil prices halted last week after U.S. data showed that domestic crude inventories are at their highest in about 80 years,” explained the Wall Street Journal.

In other words, not since 1935 – the middle year of the Great Depression – has there been such a glut in U.S. oil.  Moreover, a weekly report from Morgan Stanley remarked that forthcoming U.S. data on supply and drilling are “likely to appear ominous.”  From what we gather, this most likely means the supply glut will steepen.

Naturally, when there’s an oversupply of something, the price must drop to equilibrate demand.  How much further it must drop no one really knows.  But we surmise the price of oil must fall considerably further to close an 80 year inventory high.

Obviously, domestic oil producers wanted a quick price rebound in the first quarter of 2015.  Unfortunately, for their investors and workers, there will be a long painful grind ahead.  You can count on us to keep an eye on things for you…and offer up the latest scuttlebutt as we uncover it.

Overtly Opaque

In the meantime, the money masters in Washington offered up new words of disclarity on monetary policy this week.  In testimony before the Senate Banking committee, Fed Chair Janet Yellen sounded like she doesn’t know what in the world she and her cohorts are doing.  Here’s what we mean…

“If economic conditions continue to improve, as the committee [Federal Open Market Committee] anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” said Yellen.

Certainly, there are professions out there where it’s advantageous to be overtly opaque.  A defense attorney, for example, may intentionally confound the jury.  By muddying up the facts they may be able to defend the indefensible.

Similarly, the Federal Reserve wants muddle up their policy course.  They want maximum flexibility.  They want to keep the asset inflation game going as long as absolutely possible.

The last thing the Fed wants to do is signal when they’ll be raising the federal funds rate.  For doing so could spook markets.  This could trigger the big selloff they fear most.

When it comes down to it, the Fed has painted itself into an extraordinarily tight corner.  After six plus years of zero interest rate policy, and a 400 percent increase in the money base, the Fed is trapped.  There is absolutely no way they can exit the radical policy path they took us down without triggering the financial crisis of all financial crises.

This is the predicament the Fed has placed all of us.  This is what causes Yellen to lose sleep at night.  This is what causes them to obfuscate their next moves.

From Bad to Worse in a Big Way

No doubt, something remarkable is underway.  There’s no backing out.  There’s no backing down.  The Fed must do everything in its power to propel incessant credit expansion.

Just a small blip in credit growth, like in 2008, will cause all hell to break loose.  Markets will convulse.  Traders and investors will panic.  Congress will demand that ‘the Fed must do something.’

For now, things appear under control.  Stocks continue to stretch for new highs.  But soon the mania, blow off phase will be triggered.  Stocks will shoot toward the moon.

Of course, stocks can’t go up forever.  They can’t escape gravity.  When stocks finally roll over and crash in earnest we could see economic intervention on a grand scale.

Banks could charge negative interest rates on savers.  The government could borrow money created from nothing from the Fed and credit everyone’s bank account…they may even call it a rebate of sorts.  So, too, the Fed could create money from nothing and make direct purchases in the stock market.

In other words they’ll turn things from bad to worse in a big way.

Sincerely,

MN Gordon
for Economic Prism

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