So oil drops, the stock market rises. Then a while later, the reverse happens. What's going on?
The first thing, and often forgotten, is straightforward. If enough people take money out of commodities (oil) and put it into stocks, or vice versa, that increases prices where the money goes, and drops it where it leaves. That's part of the mechanics of the situation. It doesn't answer "why" but it is important to remember that volatile rises and falls in markets are due to what amounts to financial plumbing - move money from one part of the system to another and levels fall and rise.
Second. Commodity prices are negative to the real economy, not just because they increase prices, but because of how inflation fear really works -- not so much of inflation per se, but of the Fed's reaction to inflation. If commodities are going up too much, inflation will probably follow. Then the Fed has to raise interest rates, with the intention of crushing the economy into the dirt in order to reduce demand therefore reducing inflation. So if inflation looks bad, get out of stocks and into commodities, thus making it worse. If inflation looks better, then suddenly stocks look better.
Which is far oversimplified, but it's one lens to look at stock movements through. The other, simpler way is to ignore daily movements and concentrate on longer term movements. Bear markets often have very sharp rises and falls, and it really doesn't mean much. If it turns to a bull market, that matters. Likewise, oil has fallen to its May price, but it's still plenty high. I wouldn't read that much into it, though the fast increases and decreases indicate to me that there's a lot of "hot money" involved in moving oil prices and not just fundamentals.
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good morning, ian. thank you for your thoughtful posts. now, off to read carefully.
My broker advises not checking the market every day, at least not if you’re doing long-term investment. Too many people don’t seem to understand that day-to-day, or especially hour-to-hour, movement isn’t that important in the long run. (Day-trading is different: it’s all very-short-term investment.)
Tons of money looking for a place to grow. The more wealth the capitalist accumulates the more s/he has to find places to increase it further.
Good Morning Ian!
Good morning Ian,
With the bursting of the housing bubble the Fed reduced interest rates to banks - didn’t that put a downward pressure on the dollar and subsequently fuel rising prices for goods and commodities including oil
So, why is oil dropping? Is it because they closed the Enron loophole? If so, why aren’t the dems trumpeting this success?
The Fed was actually lowering interest rates at the same time commodities prices were increasing. Bernanke was trying to inject liquidity into financial markets but what he ended up doing was fuel the frenzy in commodities markets.
I’m still taking a wait and see approach to oil prices. They are still roughly twice what they would be without excess speculation. I doubt that they could be pushed down to pre-speculation levels because producers have come to depend on higher prices to finance economies that for the most part have nothing else going on for them.
There have been a few preliminary moves to curb excess speculation, the US economy is slowing, but I can’t help wondering how much of this is the result of selling off of positions by big investment banks to try to cover their ongoing losses in the housing crisis.
It doesn’t help that there’s excess capital looking for unrealistic returns creating short term self fulfilling trading patterns.
Good Morning, Ian. Were your ears burning?
It is my belief that the Rethugs blocked the closing of the Enron loophole however the value of the dollar has risen
when did the Enron loophole get closed? either i missed it, or it’s still there.
A lot of money did flee from housing. But not only have “producers have come to depend on higher prices to finance economies that for the most part have nothing else going on for them” also many of the extraction methods for obtaining oil from shale etc. would not be profitable at the lower prices
From McClatchy: “Oil Prices Plunge, Triggering Boom on Wall Street,” this summary wrt to fact that demand for oil has been falling:
The article also notes risks of supply disruptions from the Russia/Georgia war and the fact that a large pipeline exploded, but so far with demand falling, these supply risks which would normally move prices up don’t seem to be coming into play.
Yes, but prices are increasing even when not denominated in dollars.
Combination of that, and maybe decreased demand. US demand is down but it has been down for a while, but worldwide demand I’m not so sure is. However there are also good reasons to expect worldwide demand to drop, right after the olympics in fact (as china switches back to coal for hundreds of miles around Beijing).
This has been a long term problem. Greeny had the same issue, lower interest rates weren’t leading to money going where he wanted it to.
Dems closed it a while back as part of another bill, some of the other loopholes are still open but that one’s closed. I missed it myself.
Did they pull a Phi Grahm?
if you are referring to the farm bill, the dems claimed to have closed it (levin specifically) - but they fucked up and it only closed the enron loophole for natural gas. not crude oil.
which was pretty stupid if greenberger is correct it would have only taken the addition of two words to fix it correctly.
while there may have been another attempt i’m unware of, i’m pretty sure the amendment put into the farm bill was a major fuckup.
Can you expect something different from this congress?
From Huffpo
http://www.huffingtonpost.com/.....17981.html
It was my understanding that China shut down a lot of commerce & transport during the Olympics to help their smog/air problem. A combination to two things, China demand less and Americans demand is a lot less. Somewhere I heard that we are now driving 9 million miles less than last year. So the oil companies always thought the American demand for gas/fuel would always at least remain steady but has dropped.
Just before I left Phoenix, I saw gas priced at $3.69 with the premium at $3.89….. shocking…. Is this a ploy to take high energy costs as an issue out of the election?
silly me, i did expect the dems to at least be semi-competent.
The conflict between Russia and Georgia roughly coincided with Western markets closing for the weekend. Will there likely be a spike in oil prices tomorrow that will completely erase the recent decline?
There is no evidence on which to base your expectations :)
Fannie Mae announces $2.3 billion debt for the Second Quarter.
There is no foolproof and reliable way to predict if markets will go up or down in the short term. One thing I have noticed over the years is that it’s actions are totally and completely divorced from the issue of wether things are going good or bad for the U. S. consumer. Often times it seems to go up upon bad news for the consumer and down on good numbers. Why do the markets hate us?
Interesting that none of the Sunday Talking Head shows scheduled anyone to talk about the conflict over South Ossetia and Abkhazia (aka Georgia vs. Russia)…nor McCain’s continuing links to a lobbyist for the Georgian government who is a major campaign advisor.
Sorry Ian
But high commodity prices are NOT a bad thing. They spread wealth to mostly poor producing countries. They provide a legitimate payday for those who make and grow things–I know farmers who are getting paid for the first time in a decade. But most of all, high commodity prices make for better public policy decisions. We Are MUCH more likely to conserve petroleum at $4 a gallon than at $1.
and cole is most looking at Kirkuk today
On ABC’s This Week, Jack Tapper asked Bobby Jindal if McCain charge that Obama was “in snych with Russia” was over the top, Jindal ducked the question.
well that is 7.7 billion to make Ian’s prediction ….. looks like someone still needs to keep digging to find that pony…
Great stuff Ian, thanks.
once again my bubble of wishful thinking is burst. *g*
Drive by, what I mean is that you are in the finest tradition of FDL writers in that you make us fluent about our politics, our economy,…. and our world. I will come back later to read the comments.
Bill Richardson contrasted Obama’s desire to seek a diplomatic solution with McCain’s desire to kick Russia out of the G8 to illustrate how McCain’s much touted “experience” is no substitute for exercising good judgment.
I picking up some vibes here.
I realize that horoscopes are published for entertainment values only, but…I still read them. This is what the Cosmic Calendar says in part..
Holistic healing and alternative medical techniques can draw you like a magnet. Build bridges of trust and faith with key members in your family and friendship circles. Think more about your higher destiny as a planetary citizen.
For the whole read:
http://horoscopes.astrology.co.....osmic.html
Now, I’m off to church. Yep. I’m enigmatic. Go figure.
Thanks, I’ve been debating whether or not to sell all my possessions and invest in orgone.
Everything is falling apart
I liked the part of the article where the ranger says the remaining sections may fall in “24 hours or 2,400 years.”
How many of our modern structures will be around in 2,400 years?
This to Elliott at 39. Hit the reply link first, dummy.
I was reading about that just two seconds ago. Clicked on my FDL tab and there you are bringing it up. (cue eerie pipe organ music)
“I’m still taking a wait and see approach to oil prices. They are still roughly twice what they would be without excess speculation. I doubt that they could be pushed down to pre-speculation levels because producers have come to depend on higher prices to finance economies that for the most part have nothing else going on for them.”
There seems to be a lot of confusion as to whether or not speculation, futures trading etc, has any effect on the price of oil.
It my understanding, and Krugman has addressed this, that only supply and demand affect prices and unless a speculator buys and stores oil thus removing it from the market place his options and futures trading will have little or no effect on price. Krugman has said there is no evidence of an increase in oil storage.
:) Had to ask the hubby what orgone is. He told me.
(please keep your day job…or, if ya wanna help me organize that commune…we can talk later.)
You, sir, are no dummy.
Hugs to you this am, SD.
Okey-doke, if you think that’s best. Tell all the folks at church I said, “Hi.”
From the mid-1980s to September 2003, the inflation adjusted price of a barrel of crude oil on NYMEX was generally under $25/barrel. Then during 2004, the price rose above $40, and then $50. A series of events led the price to exceed $60 by August 11, 2005, and then briefly exceed $75 in the middle of 2006. Prices then dropped back to $60/barrel by the early part of 2007 before rising steeply again to $92/barrel by October 2007, and $99.29/barrel for December futures in New York on November 21, 2007.[1] Throughout the first half of 2008, oil regularly reached record high prices. On February 29, 2008, oil prices peaked at $103.05 per barrel,[2] and reached $110.20 on March 12, 2008,[3] the sixth record in seven trading days.[4][5] Prices on June 27, 2008, touched $141.71/barrel, for August delivery in the New York Mercantile Exchange (after the recent $140.56/barrel), amid Libya’s threat to cut output, and OPEC’s president predicted prices may reach $170 by the Northern summer.[6][7] The most recent price per barrel maximum of $147.02 was reached on July 11, 2008.[8]
Does anyone see a correlation here??????
Maybe we can just ask DICK !
Personally I’m still seeing $4.34 per gallon prices even though oils is at or less than $120.00 per barrel.
Our corrupt bipartisan Congress and Senate assures us that there is no price gouging going on.
But Exxon-Mobil just posted an 11.3 BILLLION profit for the second quarter - roughly translated to $1500.00 per second.
Yet - no new oil tankers being built, no new refineries being built, and all these dumbass americans clammering about offshore drilling to save us.
What a load of crap.
Bush-Cheney cabal has been slowly ‘’shocking” americans since their 9-11 hoax to get the oil prices up, up, and up.
They figure hike it way up then ease it down - shock wears off, then do it again - hike it way way up , then ease it down a little ……….and on and on and on
WAKE UP AMERICANS
The article doesn’t mention anything about finding a coyote holding a tiny umbrella or a suspicious looking roadrunner sighted in the area. Do I detect a cover-up?
I just got two zeds on the same thread. Cool!
Thers upstairs.
okay back. :) leaving now….
Taking my flute…I play with the band.
Music is a good thing.
No poor countries are hurting the most with the rise of commodities. They are being killed with inflation which is already double digit in some areas of the world.
Food and fuel are subsidized by developing countries but they have recently had to raise prices to locals since the governments cannot afford the support the subsidizes with out destroying their national debt.
I am always surprised how economist are happy that there is no price / wage spiral due to fact that wages have not risen during the current run up in commodity prices. Maybe it is good from a ivory tower perspective but if your blue collar or middle class stagnant wages are disastrous.
LOL.
A wise person once said, “Music is the best!” Enjoy.
I’ve bought a little gold - not an ETF - for the inflation scenario, and intermediate term U.S. treasuries for a deflation scenario. I guess that’s hedging.
Astrologically, there is a configuration approaching that I estimate we’ll see the full effects of in 2009-2010. Last time this configuration was operative was 1930-1932 and then 1964-1967.
Of course, geopolitical events play a part as well. The drive for independence that we’re currently seeing in Ossetia vis-a-vis Georgia and Georgia vis-a-vis Russia will likely be seen in other parts of the world with likely armed conflict being the means to achieve it. The Kurds and Iraqis in general come to mind. Weak, unstable governments will likely fall.
I just wish we had a little sales tax on stock, bond and commodity movement…say 1%…way less than the 5% we pay on all the stuff we buy and sell. Sure would do a lotta funding for paying off the Chinese and stocking up for Social Security and building up the infrastructure until the boyz and all the hot money cooled a bit.
Can anyone explain to me why this is a bad idea?
I hope there is some explanation. In my little trip around town earlier, gas price is $.30 lower across town than right down my street. Nice…but how can that be?
I like Krugman but I don’t think he has actually gone back and studied what the oil market has been doing the last 4 years. If he had, he might notice that political instability and supply and demand issues have had very little effect on how they have behaved. I have an extended item on this in my scandals list at 365 on this.
Here’s what can happen when you combine a commodity boom with a massive real estate market dislocation:
OIL-RICH FUND EYEING FORECLOSED US HOMES
I might add that even without the oil commodity subplot this kind of action on the part of some deep pocket somewhere is exactly what I’d expected once the scale of the mortgage crisis became clear, and therefore is exactly what seemed so nasty about it. Hugh, I haven’t checked your list in a while, but perhaps you’ll consider adding this somewhere as direct and foreseeable fallout of the refusal to regulate mortgage and other consumer lending.
I wonder if he would say the same about real estate firms trading houses amongst themselves and jacking the prices up each time.
Yes, Republicans are stalling the oil market speculation bill.
Yes, Democrats are likely to adopt some form of the Gang of 10 plan.
Yes, House Republicans are annoying.
Yes, Democrats did let the Enron loophole continue to get the farm bill.
Sigh.
I’m thinking there’s still a clear need for both a short-term semi-emergency bill to boost the economy and a longer-term bill to set the stage for and to begin the Green Revolution in real earnest. The short-term bill has to address these gasoline prices which are just killing the economy. The political race, conventions, August recess and Republicans yelling “drill drill drill” complicates matters, but shouldn’t prevent some kind of progress from being made.
Like any tax on consumption it slightly stifles that activity. We shouldn’t mind how people play with their money any more than how they use their car. It’s theirs. They earned it (presumably). And, if you want the stock market to work properly to shift resources towards deserving companies, then you don’t want it stifled.
Of course, the same can be said of any transaction in the financial world or in real estate or art or whatever.
This explains why a consumption tax is silly and why Republicans who want a consumption tax are silly (and somewhat dangerous).
Better is to tax a person’s income less some deduction for the cost of living. That way it’s only the profits taken from the economic system which are taxed away and returned to the larger system for everyone’s benefit.
The big question which economists and OMB can perhaps answer is whether there’s enough gold in them thar hills to actually fund government. If it’s not enough, then you still have to tax into the cost of living which really sucks.