By Gary Dorsch, Editor, Global Money Trends
Tension in the Middle East has always been a favorite tactic for the “Axis of Oil” –
Earlier this week, crude oil jumped $4.50 to as high as $88.20 /barrel in
Instead, with the Americans looking for a way out of the Iraqi quagmire, Arab oil kingdoms worry that if the
An accurate reading of the global supply and demand picture is certainly a big help in predicting global oil prices. But if one wants to point the “finger of blame” at the biggest culprit behind the historic rise in crude oil prices, it’s no other than Federal Reserve chief Ben “B-52” Bernanke, whose decision to bail-out Wall Street brokers and banks this past summer, by slashing short-term interest rates, set in motion another US dollar devaluation, and sent global oil prices and gold sharply higher.
The Fed is the guardian of the world’s top reserve currency, and has a responsibility to defend the purchasing power of the greenback, and keep global inflation in check. But when push comes to shove, Mr Bernanke has always voted to speed up the printing presses, to inflate the
Bernanke’s money printing binges are supported by his cohorts at the Fed. On October 9th, St Louis Fed chief William Poole said, “I do not see any implication for inflation, at least with the magnitude of the
On Sept 287th, Federal Reserve Governor Frederic Mishkin was trying to brainwash his audience at a globalization conference held in
When answering an audience question about inflation after a speech before the New York Economic Club on Oct 15th, “B-52” Ben did admit, “One cannot deny that when the dollar depreciates there is some inflationary impact.” However, to alleviate any fears that the Fed might combat inflation with higher interest rates, Bernanke added, that “expectations for slower growth may moderate price increases.”
Whenever the stock market has a bad day, reporters from the mainstream media try to find plausible explanation, for why the market turned south. This week, the surge in crude oil prices above $85 per barrel was widely blamed for the market’s sudden tremors. Yet since the first quarter of 2003, the Dow Jones Industrials and crude oil have thrived together in peaceful harmony, both climbing in unison to all-time highs. So why blame the stock market’s downturn on an “oil shock” this week?
At what point, would sharply higher oil prices begin to rattle the global stock market? (This topic will be covered in an audio broadcast on October 17th, for paid subscribers to Global Money Trends). And how would Ben “B-52” Bernanke, react in a “Twilight Zone” episode in which crude oil jumps to $100 per barrel? Nobody knows for sure, but on October 21, 2004, Mr Bernanke responded to such as question, “I would argue that the Fed’s response to the inflationary effects of an increase in oil prices should depend to some extent on the economy’s starting point.”
“If inflation has recently been on the low side of the desirable range, and the available evidence suggests that inflation expectations are likewise low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices. In this case, monetary policy need not tighten and could conceivably ease in the wake of an oil-price shock,” Bernanke said.
So don’t be surprised if “B-52” Ben argues that a weak
European Central Bank Telegraphing Rate hike to 4.25%,
On the other side of the
But once the Euro moved above $1.40, ECB chief Jean “Tricky” Trichet, tried to slow the Euro’s ascent, “We consider excessive volatility very counterproductive from the standpoint of global growth, and I stick with what I have said, that we appreciate what the Secretary of the Treasury in the United States says on the strong dollar being important,” he said on Oct 4th. (The October 19th edition of the Global Money Trends newsletter includes our forecast for the Euro and German bund yields).
Mr Trichet’s decision to hold the ECB’s repo rate unchanged at 4.00% in Sept and Oct, re-ignited inflationary pressures in the Euro zone, sending gold 8% higher to 536 euros /oz since mid-August. The ECB is permitting its Euro M3 money supply to expand at an 11.6% annualized rate, its fastest acceleration in history, which is inflating gold prices in
Finally on Oct 11th, Bundesbank chief Axel Weber hinted at a resumption of the ECB’s baby-step tightening campaign, which was derailed by the Fed’s exercise of the “Bernanke Put”. “There is a danger that additional action will arise against the expected pickup in inflation in coming months, particularly if the price increases occur more broadly and not only in energy and volatile food prices,” Weber said.
“Monetary policy can be accommodative, that is support the economy in certain phases, as long as the medium-term inflation expectations remain in line with price stability. But if risks to price stability threaten to materialize, monetary policy must stop supporting already robust growth or turn restrictive,” Weber warned. Those are some pretty tough words, but the ECB is still in the “jawboning” stage, and has no intention of lifting its repo rate in November.
The ECB’s move to drain 60 billion euros from the banking system on Sept 10th did put a floor under the German 10-year bund yield at 4.05%, and talk of a tighter monetary policy has elevated yields to 4.37% today. But German bund yields remain far below their July highs of 4.70%, and the ECB’s operations in the money markets are simply not high enough to curb inflation pressures in the commodities sector.
Turkish Saber Rattling lifts Crude Oil
Earlier this week, Turkish PM Recep Erdogan asked his parliament to approve plans for an invasion into northern
Erdogan said his country will not be deterred by the diplomatic consequences if it decides to stage a cross-border offensive against Kurdish rebels. “If such an option is chosen, whatever its price, it will be paid. There could be pros and cons of such a decision, but what is important is our country’s interests.” With regards to whether or not a Turkish invasion of
Republicans call for Military Strike against Iran,
A possible Turkish invasion into northern
“Anybody who wants to be president of the
On July 4th, Republican presidential candidate Mitt Romney said he would use military force against
On June 12th, the UN atomic agency said
Then on October 15th, US Defense Secretary Robert Gates called
“Our allies must work together on robust, far-reaching and strongly enforced economic sanctions. We must exert pressure in the diplomatic and political arenas as well,” he said.
“And, as President Bush has said, with this regime we must also keep all options on the table,” he said, in a veiled reference to possible military action.
Gates will meet with Israel’s new defense minister, Ehud Barak, in Washington on October 16th, to discuss the joint anti-missile Arrow-2 project, designed to intercept missiles that could deployed by Iran and Syria.
Equally important, the Pantsyr-S1E missiles, purchased by
Equally important, the Pantsyr-S1E missiles, purchased by
Such valuable information on Russian missile consignments to
On June 12th, Admiral Ali Shamkhani, a former Iranian defense minister, told the US Defense News weekly, in the event of an American attack on
Most importantly, is the potential shutdown of oil supplies through the Strait of Hormuz, a strategically important stretch of water between the
The closing of the Straits for the passage of tankers will create a severe shortage that would send shock waves to the energy markets already beset by tight supplies and a limited spare capacity. It is anybody’s guess as to how high the price of crude oil could go if Iranian threats were materialized. A surge above $100 per barrel could trigger a world economic recession of untold consequences.
France hints at Military action against Iran,
One is not accustomed to hearing threats of war from the enlightened French government, but since Nicolas Sarkozy became the president of
“If we allow
In light of the Iranian nuclear crisis, French Foreign Minister Bernard Kouchner shocked the world on Sept 16th, “We have to prepare for the worst, and the worst, sir, is war,” he said in an interview on LCI television and RTL radio.
Mr. Sarkozy went to
In a visit to
Oct 16th, Putin said
The Caspian nations of
Senior American defense and intelligence officials told the Telegraph that Mr Bush’s inner circle has decided not to leave office with
Chavez pushed two
Before heading to
Tension in the Middle East boosts the Kremlin’s Coffers
“A series of crises in oil supply is likely over the coming decades,” predicted Russian Industry and Energy Minister Victor Khristenko nearly two years ago, on October 24, 2005. “The first, related to the peak and decline of non-OPEC production, is practically upon us and underpins the currently high oil prices. The imminent inability of non-OPEC production to meet incremental demand and its decline after 2010 precipitates the second crisis as OPEC’s diminishing spare capacity becomes less and less able to accommodate short-term fluctuations,” he said.
“The third crisis, due to OPEC’s incremental supply being unable to meet incremental demand, follows in the first half of the next decade. This assumes that OPEC’s reserves are as published. These crises will have global economic and geopolitical significance. The oil price will be high and volatile, and demand growth will have to be curtailed,” Mr Khristenko warned two years ago.
But alas, there are no central banks in the world that are willing to slow down their economies, to reduce the demand for crude oil. Just the opposite has transpired, with central banks in
In keeping with world market trends, the Russian Finance Ministry lifted the tax of Russian oil exports by $26 to $250 per ton, which will bring even more money into the Kremlin’s coffers.
Yesterday, the price of
It’s no wonder that Putin wants to stymie any UN initiative that can halt
China deepens Ties with Tehran
Iranian crude oil-and gas reserves are largely untapped because of the threat of US sanctions on companies doing business with the Mullahs, leaving a large part of its petroleum fields unexplored. Since
OPEC can’t Stop Oil Spike
OPEC says there is no fundamental justification for a price run-up that has lifted oil from below $70 in mid-August. “OPEC cannot do much now,” said
“OPEC is carefully watching developments in the oil market and has observed with concern the recent escalation in oil prices. The rising oil prices which we are currently witnessing are, however, largely being driven by market speculators. Persistent refinery bottlenecks and seasonal maintenance work, ongoing geopolitical problems in the
OPEC is reluctant to boost oil output beyond the scheduled 500,000 bpd increase in November, realizing that the Federal Reserve and other central banks are simply printing large amounts of monopoly money to pay for higher crude oil imports. To compensate for the fiat currency devaluations, OPEC seeks a higher oil price, and is expected to keep a tight rein on oil supply.
At some point, it would become necessary for the Bernanke Fed to reverse course, and start slowing down the money printing machine, if it wants to prevent an out-break of hyper-inflation. Yet one has to wonder if Mr Bernanke has the political license to tighten the money supply, when US Treasury chief Henry Paulson wants to keep the
Since Mr Bernanke took the helm at the Federal Reserve, the Dow Jones Industrials have soared by roughly 32% to an all-time high near 14,000. But gold prices have also climbed by 64% to a 28-year high of $765 /oz, which in turn, has knocked the DJI to Gold ratio from 23 oz’s to 18.2 oz’s of gold today. In hard money terms, the DJI’s spectacular rally is nothing more than a monetary illusion. One would have been much better off, owning an ounce of gold, rather than a DJI share.
Which asset class would be a better choice to own, if crude oil climbs to $100 per barrel in the weeks or months ahead? The answer of course, is elementary.
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Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.
He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.
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