When the gas gets cheap, cheap money gets dear

Dec 8, 2014

New York, New York

    Hang on hang on hang on
    To what we've got

    - Frankie Valli

Dear Diary,

New York is filling up with holiday shoppers and tourists. On Saturday, we went to a show - Jersey Boys. It was not an especially complex or subtle storyline, but the music, of Frankie Valli and the Four Seasons, was lively and agreeable. It took us back to the '50s and '60s.

Those were the days! Believe it or not, back then people had jobs...prices were fairly stable...and the GDP was growing at twice or three times today's rates (and so were personal incomes). How was it possible? The market set interest rates back then, not the Fed. The market determined stock prices too; the Fed wouldn't have even dreamed...let alone dared...to try to rig prices. And quantitative easing? It was probably illegal...and certainly would have been considered immoral or insane.

But there are fads in music...and in central banking, too. The music industry has given us public twerking. And in central banking, we have trillion dollar asset buying/price managing programs. Both are obscene. But both are popular. And almost nobody wants to see them stop.

But in the end Mr. Market...nature...the gods...will prevail. Thy will be done. It always is.

As we closed out last week, stocks were climbing to new highs and gold was taking a $17 hit. But what happens next is not up to us. It depends on the gods, who represent the forces of 'what shall be'...not 'what we want things to be.'

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All we know is that the outcome cannot be controlled by the Fed. Or by investors. Or households. Or Janet Yellen. Or Paul Krugman. Or the president of the USA. Not even Warren Buffett or the NFL can dictate the terms of this story. You can tinker with nature...you can bend and twist the markets...you can delay and outrage the gods...but you can never control them.

If smart people...well informed...armed with modern theories and 'policy tools'...could actually control an economy or a market, why would there ever be melt-downs, breakdowns, or shake-downs? Why would Zimbabwe's currency become worthless? Why would Venezuela feel 'the hurtin'? Why would Japan's GDP be the same as it was 25 years ago - despite a quarter century of 'stimulus' measures?

No, dear diary, even the most powerful policy makers and the smartest theorists cannot defy the gods. In the end, we don't get what we want. We get what we deserve.

Now, thanks to our enlightened economists and their careful management, we're told, the US economy is really doing quite well. At least, that's the line they're taking at the New York Times:

    "On Friday, the Labor Department reported that US payrolls rose by 321,000 jobs in November and that hourly wages jumped, easily beating economists' expectations."
Health care spending is slowing. The number of uninsured Americans is falling. Federal deficits are falling. And you can buy a gallon of regular gasoline for $2.71, only 5 times the price when Ike and Dick were sure to click.

Cross examining these 'facts,' we find some discrepancies. First, according to the BLS Household Survey the number of full time jobs actually fell by 150,000 in November; only part time jobs showed a gain. Second, almost all new jobs in the US - 93% -- since 2009 have been created in the energy sector.

The Fed says falling prices are bad. It is spending trillions to keep prices of stocks and bonds going up. And it insists that consumer prices rise too - by 2% per year.

But a falling price for oil is said to be a good thing. Do we have that right? Sometimes we can't remember. Let see, Americans can now spend less on gasoline, leaving them more to spend on other things. Heck, we don't need no stinkin' QE anymore. Now we have cheap gas!

Wait. Since the crisis of '08-'09 approximately one third of capital spending in the S&P went into energy. And as much as 20% of the high yield market (junk) now depends on the energy sector. The whole boom was built on low interest rates and a high oil price. Without cheap money cheap gas wouldn't be possible. And when gas goes too cheap, the cheap money suddenly gets very dear.

Nearly a trillion dollars spending worldwide is focused on new energy production. And with oil prices down nearly 40%, much of that spending...many of the 9.3 million jobs created in the last 5 years...and all the subprime energy debt... are in danger. Unless oil prices go back up soon, there could be Hell to pay.

The Saudis seem to be determined to keep on pumping. The only way they can protect their market share is by remaining the low-cost producer. US frackers are likely to keep fracking too. They've bet billions on forcing crude out of grudging rock. They won't give up easily. Instead, they'll borrow more heavily in order to stay in business. But the more they pump...the longer oil prices stay low.

Paying $60 to extract a $50 barrel of oil is not a good business no matter how low interest rates are. Already, the gods have smashed the oil companies, the drillers, the transporters, and almost everything else that reeks of gasoline. Soon, they'll a whack at their subprime debt too.

Will they bring down other stocks? Bonds? The economy? Only a fool would pretend to know.

As to twerking, your editor hasn't made up his mind. But as to the Fed and its meddling in the markets he is sure; less is more.

Trying to manage an economy is like trying to manage the love life of a teenage daughter, it's just going to make things worse.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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