With most investors believing it's inevitable that Ben Bernanke will institute another round of quantitative easing, it has helped support oil prices which otherwise would probably drop much further than the support it has found in the mid $80 a barrel range.
That has also helped shore up the price of other commodities as well, which would have otherwise plummeted even worse than they have been.
Add to that the enormous upward move of the U.S. dollar, weakening China and Brazil, along with devastated Europe, and you see how the price of commodities, outside of agriculture, should be dropping much more than they have.
But the bears have to be careful after learning from the past that Ben Bernanke's propensity to print money is insatiable, and it's only a matter of when he'll do it again, not if he's going to do it.
That's the great uncertainty in the market which keeps support under oil and other commodity prices. And that's even when everyone knows over the long haul more stimulus won't help the economy at all, but it will give a short-term psychological boost, which will push up the prices of many commodities.
Another support for commodities is in regard to the decision by European leaders to commit to taking further steps to shore up the system. While there are still no particulars there, it remains in the back of the mind of bears who would love to short the market even more, but could easily get hit hard if the Federal Reserve stimulates and Europe clarifies what steps it plans on taking going forward. Those elements, more than anything else, are keeping the price of oil from plummeting to below $50 a barrel at this time.
Unwillingness to bet against the probability of another round of quantitative easing is what's standing between the free fall of the price of most commodities.
That's why with oil the price will probably remain in the $80s until more clarity is revealed.
The next important moment is when Ben Bernanke addresses Congress next week about the state of the economy. Traders and investors will listen closely for any clue on which way things may go in the short term.
Showing posts with label Ben Bernanke. Show all posts
Showing posts with label Ben Bernanke. Show all posts
Thursday, July 12, 2012
Tuesday, June 8, 2010
BP (NYSE:BP): Declaring Bankruptcy
Andrew Ross Sorkin, writes that Wall Street is starting to look seriously at BP (NYSE:BP) and their potential to file bankruptcy.
"The idea that BP might one day file for bankruptcy, particularly as part of a merger that would enable it to cardon off it's liabilities from the spill, is starting to percolate on Wall Street. Bankers and lawyers are already sizing up potential deals (and counting their potential fees.) Given the plunge in BP's share prices, the company has lost more than a third of its value since Deepwater Horizon blew. Some bankers and analysts say BP is starting to look like take over bait. The question is, who would buy BP given its enormous potential liabilities," said Sorkin.
Federal Reserve chairman, Ben Bernanke predicts, "we'll have continued recovery but it won't feel terrific." He offers cautious reassurance that the U.S. recovery is on track, despite the turmoil we've seen in the financial markets. "There seems to be a good bit of momentum in consumer spending and investments," says Bernanke.
Although BP isn't verifying or denying weather they are declaring bankruptcy or not, they seem quite confident. Despite the fact they still have yet to contain the fuel spill spewing onto the seabed, have already spent over a billion dollars, and haven't even started on the fuel cleanup, or dealt with the legal claims that are pouring in.
"The idea that BP might one day file for bankruptcy, particularly as part of a merger that would enable it to cardon off it's liabilities from the spill, is starting to percolate on Wall Street. Bankers and lawyers are already sizing up potential deals (and counting their potential fees.) Given the plunge in BP's share prices, the company has lost more than a third of its value since Deepwater Horizon blew. Some bankers and analysts say BP is starting to look like take over bait. The question is, who would buy BP given its enormous potential liabilities," said Sorkin.
Federal Reserve chairman, Ben Bernanke predicts, "we'll have continued recovery but it won't feel terrific." He offers cautious reassurance that the U.S. recovery is on track, despite the turmoil we've seen in the financial markets. "There seems to be a good bit of momentum in consumer spending and investments," says Bernanke.
Although BP isn't verifying or denying weather they are declaring bankruptcy or not, they seem quite confident. Despite the fact they still have yet to contain the fuel spill spewing onto the seabed, have already spent over a billion dollars, and haven't even started on the fuel cleanup, or dealt with the legal claims that are pouring in.
Saturday, August 2, 2008
The US dollar and Oil
Prior to the oil price going through the roof last Friday, something unusual occurred - the US dollar rallied. The stronger greenback impacted the commodity markets, with oil, base metals and the Dow Jones Industrials for that matter all falling sharply.
The source of the beleaguered US dollar's rally was hawkish inflation comments from Fed Chairman Ben Bernanke, in a speech at the International Monetary Conference in sunny Barcelona, Spain. The foreign exchange market's ears pricked up with the following words:
"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."
It's extraordinary that after years of US dollar weakness, the Fed decides that now is the time to act concerned. We believe there are a few reasons for this change of tact, mainly political. But there are many more reasons why the Fed's words are unlikely to be backed up with actions, and for this reason, we expect continued US dollar weakness and rising inflation in the years ahead.
Let's put Bernanke's dollar comments into context.
Since September last year the Fed has slashed interest rates from 4.75% to 2%, a massive reduction in nominal terms. But in an inflationary environment, the reduction in real interest rates has been even greater. With inflation running around 4% (officially...) real rates are negative.
While the Fed's intent was to prop up careless Wall Street investment banks, negative real rates have caused frenzied speculation in the commodity markets, most notably oil. Following the recent round of interest rate cuts, the oil price rallied to more than US$130 a barrel, a level that is clearly destabilising for the global economy.
Markets were not helped either by Israel's threats to attack Iran should the Iranians continue to develop a nuclear capability. How this development will play out is anyone's guess but with Iranian President Mahmoud Ahmadinejad threatening to destroy Israel a few years ago, it is unlikely that the Israeli's are bluffing. There is also a precedent in 1980 when Israeli jets bombed a nuclear reactor that was being built in Iraq,
US Treasury Secretary Henry Paulson has had his hands full in the Middle East, where he had face to face talks with one of the US Treasury's biggest group of lenders, OPEC. Oil producing nations have for decades recycled billions of US petro dollars back into US treasury bonds and securities, thus providing financial support for the dollar. But there are signs this relationship may be coming to an end.
Inflation, which has lain dormant for many decades, is now making a come back that Elvis would be proud of. The once harmonious relationship that existed between the US and OPEC is no longer comfortable.
Most of the Mid East oil producers have their currencies pegged to the dollar, which means they cannot conduct monetary policy independently. So when US rates fall, their official interest rates also decline.
As a result, inflation is running at double-digit rates in most of these countries, which is in turn leading to questions over whether the currency pegs should be maintained (and indeed China is asking itself the same question). With a chronically weak US dollar, these countries are massively disadvantaged. As well as importing inflation, a socially destabilising effect, they are selling a finite asset (crude oil) for depreciating dollars.
So Henry Paulson's recent trip to the Mid-East would have made for particularly interesting conversation. OPEC's support for the US dollar is crucial. Because oil is priced in dollars, all oil production is 'monetised' in US dollars and provides a huge source of demand for the Greenback. We believe that without OPEC being onside, the US dollar is completely exposed.
Imagine if oil were all of a sudden traded in euro's? The US, with its huge oil bill, would no longer be able to print dollars (issue treasury bonds to OPEC and China) to pay the bills. Instead, it would be required to borrow euro's to buy the required amount of oil. Nearly every other country around the world would also be in the position of no longer having to buy dollars to pay for oil.
While a switch to the euro (or a basket of currencies) is not about to happen any time soon, this explanation provides some idea of how interlinked the US dollar and oil are, and inevitably, the price of gold. Behind closed doors Henry Paulson was undoubtedly given some stern words over the strength of the US dollar, or lack thereof. "If you want us to maintain our currency pegs, stop devaluing your currency." Or words to that effect.
And as Bernanke noted in his speech in Barcelona, "in collaboration with our colleagues at the Treasury...we are attentive to the implications of changes in the value of the dollar for inflation..."
Given Paulson has zero credibility in talking up the dollar (he of the strong dollar mantra) he has obviously 'collaborated' with the Federal Reserve and enlisted the credible Bernanke to try and win the FX market over. And they listened, for a few days at least. We suspect that the very short term speculators were spooked out of their positions, and the dollar benefitted from short covering. On the flip side, commodities and commodity related stocks sold off sharply.
But the reality is that Bernanke will have to do more than just 'talk the dollar up'. Soon after Bernanke's comments last Tuesday, the European Central Bank was again talking tough on inflation (they have better form in managing inflation expectations) and the dollar promptly sold off against its main rival, the euro.
Then, in US trade on Friday, firm evidence arrived that the US economy is indeed slowing down, with the unemployment rate soaring from 5% to 5.50% following the release of May's payroll statistics.
These numbers confirmed to us that if the US economy is to avoid a deep recession, interest rates will remain low, and by implication, real interest rates will remain negative.
The geopolitics now being played out in the Middle East add another layer of complexity to the oil market. And with Barrack Obama being the clear favourite for the Whitehouse at the end of the year, the risk of an Israel/Iran conflict is now rapidly escalating. We thought oil was due for a correction last week, but the threat of Israeli action could drive oil even higher, and this is now being reflected with a risk premium being priced into the market
This creates more headaches for the US in their attempts to control inflation.
Inevitably, no matter how much Bernanke tries to anchor 'inflationary expectations', the reality of negative real interest rates will ensure inflation in the US (and globally for that matter) continues to gather momentum.
The attached chart shows the recent performance of long term US Government bond yields. If inflationary pressures continue to build, and we suspect they will, bond yields will slowly rise and bond prices will slowly fall.
The reality is that if the US wants to fight inflation, it must raise rates. As we have repeatedly stated, we do not see that as a realistic policy option for the US and we believe the authorities will continue to 'manage' the US dollar lower. The extraordinary volatility we are witnessing in the markets on an almost daily basis is the result of these huge imbalances that have become embedded in the global economy. The market is now attempting to right these imbalances through a serious bout of global US dollar inflation, which is being passed on to every other nation in the world.
About the Author
Fat Prophets are leading global independent stock market advisors with a comprehensive product range of research reports for all investors. Visit the Fat Prophets website to learn more and get expert advice on investing in shares and managed funds.
The source of the beleaguered US dollar's rally was hawkish inflation comments from Fed Chairman Ben Bernanke, in a speech at the International Monetary Conference in sunny Barcelona, Spain. The foreign exchange market's ears pricked up with the following words:
"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."
It's extraordinary that after years of US dollar weakness, the Fed decides that now is the time to act concerned. We believe there are a few reasons for this change of tact, mainly political. But there are many more reasons why the Fed's words are unlikely to be backed up with actions, and for this reason, we expect continued US dollar weakness and rising inflation in the years ahead.
Let's put Bernanke's dollar comments into context.
Since September last year the Fed has slashed interest rates from 4.75% to 2%, a massive reduction in nominal terms. But in an inflationary environment, the reduction in real interest rates has been even greater. With inflation running around 4% (officially...) real rates are negative.
While the Fed's intent was to prop up careless Wall Street investment banks, negative real rates have caused frenzied speculation in the commodity markets, most notably oil. Following the recent round of interest rate cuts, the oil price rallied to more than US$130 a barrel, a level that is clearly destabilising for the global economy.
Markets were not helped either by Israel's threats to attack Iran should the Iranians continue to develop a nuclear capability. How this development will play out is anyone's guess but with Iranian President Mahmoud Ahmadinejad threatening to destroy Israel a few years ago, it is unlikely that the Israeli's are bluffing. There is also a precedent in 1980 when Israeli jets bombed a nuclear reactor that was being built in Iraq,
US Treasury Secretary Henry Paulson has had his hands full in the Middle East, where he had face to face talks with one of the US Treasury's biggest group of lenders, OPEC. Oil producing nations have for decades recycled billions of US petro dollars back into US treasury bonds and securities, thus providing financial support for the dollar. But there are signs this relationship may be coming to an end.
Inflation, which has lain dormant for many decades, is now making a come back that Elvis would be proud of. The once harmonious relationship that existed between the US and OPEC is no longer comfortable.
Most of the Mid East oil producers have their currencies pegged to the dollar, which means they cannot conduct monetary policy independently. So when US rates fall, their official interest rates also decline.
As a result, inflation is running at double-digit rates in most of these countries, which is in turn leading to questions over whether the currency pegs should be maintained (and indeed China is asking itself the same question). With a chronically weak US dollar, these countries are massively disadvantaged. As well as importing inflation, a socially destabilising effect, they are selling a finite asset (crude oil) for depreciating dollars.
So Henry Paulson's recent trip to the Mid-East would have made for particularly interesting conversation. OPEC's support for the US dollar is crucial. Because oil is priced in dollars, all oil production is 'monetised' in US dollars and provides a huge source of demand for the Greenback. We believe that without OPEC being onside, the US dollar is completely exposed.
Imagine if oil were all of a sudden traded in euro's? The US, with its huge oil bill, would no longer be able to print dollars (issue treasury bonds to OPEC and China) to pay the bills. Instead, it would be required to borrow euro's to buy the required amount of oil. Nearly every other country around the world would also be in the position of no longer having to buy dollars to pay for oil.
While a switch to the euro (or a basket of currencies) is not about to happen any time soon, this explanation provides some idea of how interlinked the US dollar and oil are, and inevitably, the price of gold. Behind closed doors Henry Paulson was undoubtedly given some stern words over the strength of the US dollar, or lack thereof. "If you want us to maintain our currency pegs, stop devaluing your currency." Or words to that effect.
And as Bernanke noted in his speech in Barcelona, "in collaboration with our colleagues at the Treasury...we are attentive to the implications of changes in the value of the dollar for inflation..."
Given Paulson has zero credibility in talking up the dollar (he of the strong dollar mantra) he has obviously 'collaborated' with the Federal Reserve and enlisted the credible Bernanke to try and win the FX market over. And they listened, for a few days at least. We suspect that the very short term speculators were spooked out of their positions, and the dollar benefitted from short covering. On the flip side, commodities and commodity related stocks sold off sharply.
But the reality is that Bernanke will have to do more than just 'talk the dollar up'. Soon after Bernanke's comments last Tuesday, the European Central Bank was again talking tough on inflation (they have better form in managing inflation expectations) and the dollar promptly sold off against its main rival, the euro.
Then, in US trade on Friday, firm evidence arrived that the US economy is indeed slowing down, with the unemployment rate soaring from 5% to 5.50% following the release of May's payroll statistics.
These numbers confirmed to us that if the US economy is to avoid a deep recession, interest rates will remain low, and by implication, real interest rates will remain negative.
The geopolitics now being played out in the Middle East add another layer of complexity to the oil market. And with Barrack Obama being the clear favourite for the Whitehouse at the end of the year, the risk of an Israel/Iran conflict is now rapidly escalating. We thought oil was due for a correction last week, but the threat of Israeli action could drive oil even higher, and this is now being reflected with a risk premium being priced into the market
This creates more headaches for the US in their attempts to control inflation.
Inevitably, no matter how much Bernanke tries to anchor 'inflationary expectations', the reality of negative real interest rates will ensure inflation in the US (and globally for that matter) continues to gather momentum.
The attached chart shows the recent performance of long term US Government bond yields. If inflationary pressures continue to build, and we suspect they will, bond yields will slowly rise and bond prices will slowly fall.
The reality is that if the US wants to fight inflation, it must raise rates. As we have repeatedly stated, we do not see that as a realistic policy option for the US and we believe the authorities will continue to 'manage' the US dollar lower. The extraordinary volatility we are witnessing in the markets on an almost daily basis is the result of these huge imbalances that have become embedded in the global economy. The market is now attempting to right these imbalances through a serious bout of global US dollar inflation, which is being passed on to every other nation in the world.
About the Author
Fat Prophets are leading global independent stock market advisors with a comprehensive product range of research reports for all investors. Visit the Fat Prophets website to learn more and get expert advice on investing in shares and managed funds.
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