Oil prices are quite high, and consumer spending is holding up.
Remember our old “Cash for Clunkers” QE II model? I said that everyone who wanted to sell bonds at all for the next few months would do so before QE II ended. This would result in a natural vacuum of sellers after QE II ended.
I also said there would be the “Godzilla of all bond rallies” post QE II. This is a chart of 30 year yields. Yields are opposite of price. Lower yields mean higher prices.
See that huge red bar at the end? That means a huge rally in bond prices.
Lots of people think the world is ending right now. It looks bad out there, but there should be some appreciation of the fact that the most willing sellers of U.S. Treasuries sold them during the actual time of QE II.
The actual GDP numbers – while anemic – aren’t falling at anywhere near late 2008 levels.
Question: How much of this panic is due to a completely wrong interpration of what’s happening in the oil markets?
People say that lower oil prices means that the economy is tanking, but it’s more likely that the speculative bid under oil just shifted out of oil.
Lower oil prices are great for the real economy, not bad.
The payroll tax cut was designed to help lower income taxpayers get more money, but the tax cut effect has been entirely swamped by higher gas prices. Higher gas prices are stealing our recovery!
I was extremely bullish on the United States economy earlier in the year, when the tax cuts were announced. I thought these specific cuts were going to do wonders for the United States economy.
Unfortunately, the tax cuts have had zero stimulus impact so far. The entire stimulus has been eaten up by higher energy costs.
The payroll tax cuts were expected to add about $110 billion to the pocketbooks of consumers over 2011. This ends up being about .8% of GDP in raw numbers. .8% of GDP is a big boost to the economy. This does not inclue the multiplier effect. If we use an estimated 1.3 as a multiplier, we get over 1% of GDP impact on the economy from the payroll tax cuts. Great!
But then something absolutely wonderful happened- the Libyan Civil war. But, it had horrible side-effects on the U.S. economy. The Libyan Civil war caused a spike in energy and gasoline prices.
The estimated cost to the consumer for the increased energy costs is about $120bn over the course of a year. This number is about the size of the payroll tax cut. The entire years worth of tax cuts was to be worth about $110bn.
Basically, the entire payroll tax cut went to pay for increased energy costs. There was zero stimulative effect due to tax cuts, because they went to pay for increased energy costs.
I do not know why the U.S. government did not open up the Strategic Oil Reserve and pay whatever price necessary to get Saudi Arabia to sell that oil. They should have done this back in March. But they did not open the SOR. So here we are in June, still struggling, while the propagandists at Forbes claim the tax cuts did not work.
Oil is down $4.00 today. A settlement below the old lows breaks a huge level of support, and the next stop is $80 or so.
Why did oil get hammered today? This is an incredible post over at FT Alphaville. The oil markets have plenty of supply, and the only thing keeping oil at a high price is the incredible level of speculation we allow in the oil markets. You’d think for a strategic resource, we’d have a bit more care about making sure the price of oil was low for consumers. But apparently, this is not the case.
But the good news is we are going to see much cheaper oil sometime very soon, perhaps as soon as tomorrow!
Take aways from the post:
- Saudi Arabia is acting nearly completely independently of OPEC
- The U.S. considered and is considering opening the Strategic Oil Reserve to cause prices to fall
- The U.S could be intervening directly in the Brent Crude market with Saudi Arabia
Plus, the only reason the deal fell apart was about the price to be paid for the oil! I cannot believe they let this incredible opportunity go! Oil could have been at $80 a barrel in a matter of days. But it does appear that it is going to $80 anyway.
If oil falls to $80, then expect gasoline to fall by nearly $.80 per gallon from current levels, which are already $.20 below the highs. This will restore $120bn of spending power to consumers, or about .8% of GDP. More on this in a moment.
Oil is very, very heavy today….
Oil price fell today, but they could fall even more tomorrow. Germany has recognized the rebels in Libya as being the official government.
The speculative premium in oil is very high right now, and part of this premium is due to the Libyan revolution.
Oil could be at $85 in just a few days. In a few weeks more, it could be at $70.
Here is a chart of the amount of oil Saudi Arabia is pumping. It’s a significant increase and makes up for nearly the entire amount Lybia is not producing. It is the highest amount of oil they have produced since the financial meltdown nearly 3 years ago.
My thinking is that Saudi Arabia will continue to pump this much oil until the price of oil comes down to $70. The Saudi’s are clearly worried about oil prices being too high.
Much of the inflation worries are due to high oil prices. If we see $3.00 gasoline again, it is totally possible that we will see a big jump in consumer spending.
But keep it coming, Saudi Arabia… we could use it.