June Headline CPI could be 2.3%, down 1.3% from May, due to falling gas prices.

Gas Prices are going down

Gasoline prices have been falling like crazy in June.  Gas is already down $.14 in June.  You can see the remarkably straight line decline – it’s about 2 cents every 3 days.

Here at Crucible headquarters, we can do simple math.  I assumed 10 more days of price declines at the same rate, which would shave another 6 cents off the price of gasoline, for a total of $.20 of declines.   That’s 5.2% decrease in the price of gasoline.

Then I went over to the macroblog at the fed, and used their handy guide to how to calculate CPI given a few prices. I then pushed this into a spreadsheet, using the same assumptions as David Altig did at his Atlanta Fed blog.

It turns out that if gas declines another 6 cents, headline CPI will be 2.3%.  Thats down 1.3% from May!  Then if we see a bit of spillover from lower energy prices into lower food costs – say for example if corn loses ethanol subsidies and drops 20% or something like that – we could see an extended period of lower CPI.

Oil and Gas will fall dramatically in price, starting 4 hours ago

Oil prices are down $4/barrel today

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.

Gas Prices are due for a tumble

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….

Saudi Arabia, the only country in OPEC that can pump more oil, says it will pump more oil

What ever happened to good ole’ common sense? What OPEC says doesn’t matter. What Saudi Arabia says matters, because only Saudi Arabia can meaningfully increase how much oil they pump tomorrow.

Here is the wonderful Oil Drum with an easy to read graph of who has excess capacity.   See that gigantic purple band that dominates the entire graph?  That’s Saudi Arabia!  Just eyeballing it, Saudi Arabia has double the spare capacity of the rest of OPEC combined!

So when the Saudi oil minister says they will pump lots more oil, it basically means OPEC is going to pump more oil.  Not only that, Saudi Arabia has the support of Kuwait and the United Arab Emirates.  I hope we have the support of Iraq, otherwise we spent a few trillion on nothing.

Saudi Arabia is the only one that matters right now, and they have indicated there will be supply.  Mosler says – due to conversations with oil brokers –  Saudi Arabia tells refiners a price, and then tells refiners they will fill every order above that price.

 

 

Saudi Arabia opens the Spigot

Saudi Oil Production highest since financial crisis

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.

High gas prices are shifting 2% of GDP to oil producers, but we still allow massive long only speculation in the energy markets

There is an easy way to find out how much impact gas prices have on the economy.  The rule of thumb math is that every 1 cent of increase in the price of gasoline exchanges $1bn of consumer spending from goods to energy.   With this in mind, Deutsche Bank estimates we’ve lost between $90 and $150 Billion in demand in the first half including all of May.

But for some reason, they don’t put this into straightforward GDP terms. Choosing a $120bn midpoint of the estimate of losses, and annualizing by the time spent through May, we get 288bn lost on an annualized basis.  The U.S. Economy is about 14.1 trillion.  This is 2% of GDP.

High oil prices are pushing 2% of our entire economy into the energy markets instead of other goods.

Yet, we have huge, huge investment funds buying commodities like crazy and only ever from the long side.  This is a serious mistake that literally costs us vast amounts of long term economic growth.

TC Midwest Manufacturing Survey shows continued, robust growth

The Trader’s Crucible Midwest Manufacturing Survey shows the midwest economy continues to be strong due to a rebound in manufacturing. Some quotes from the report:

• We had record months in April and May.  June and July will break these records.
• We have orders and work booked through September – our farthest bookings since the late 1990’s
• Steel prices are up dramatically over the beginning of the year.
• We are turning away work for the first time in years.
• We cannot find enough qualified people at current wages.  We are hiring and expanding.

Ok, the TC Midwest Manufacturing Survey is just me talking with my dad. We were able to have a great chat on Memorial Day.  His business is fully leveraged to the aluminum and auto parts industry here in the states.  His clients are running full blast and are willing to pay extra for immediate work.

Good news for the U.S. economy overall?  I don’t know.  My personal experience with his business over years has been that it is tightly coupled and a coincident indicator to the overall economy.

I am slightly skeptical of the Chicago PMI that came out today.   Most of the quotes seem to talk about high commodity prices, and not as much about slowing business.    The internals seem to support a screaming manufacturing sector.

Hyperinflation Hoax: China still cannot emport that much inflation to the U.S.

We do not face much inflation threat here in the U.S.

It’s a never ending battle against the forces of willful ignorance over here at the Trader’s Crucible. We now have Soc Gen and The Business Insider warning about how we will be facing huge inflation from China.

One thing you’ll notice in many of these hyperinflation hyperventilation pieces is a distinct lack of math. Yes, the story sounds good – China and India are growing rapidly – but the math does not support the story that there is an ocean of inflation that will swamp the U.S.  The numbers do not support this narrative at all.

The math is simple: Take the total amount of inflation in the U.S. and China, and then divvy it up anyway you like.  The total amount of inflation will remain nearly the same no matter who gets it.  If you want 0% inflation in China and see what happens to inflation in the U.S., you can do this with math.

Note that the total size of the combined Chinese and U.S. economies is huge.  Some of the inflation that China is experiencing must be allocated to China as well.

Total Inflation Calculations for China and U.S.

I wrote a whole post on what to do and how to do it.  It is not hard work and requires nothing more than a few spreadsheet calculations.  I used extremely aggressive assumptions about inflation for China at 10% in my calculations.  But even using this very high 10% figure, there isn’t that much inflation in the world.    Unless something fundamentally changes, the U.S. does not face a huge inflation threat from China.

Does MMT hint will we see $2.00 gasoline by July 15th?

It could happen

Oil is falling. Oil is falling rapidly. The drop is nothing short of astounding.  The conventional wisdom is:

“The Fed’s view, and our view in the UBS mining team is that QE2 operates through portfolio choices. When the Fed buys treasuries, it lowers yields relative to other risk assets – forcing portfolios to shift up the risk curve. That shift incorporates strong capital flows overseas – which can be seen in the dramatic rise in foreign exchange reserves in recent months.”

The MMT view is different.  It says:

“QE II is an asset swap.  Investors that wanted to swap their treasuries for higher yield assets could have done so at any time through the repo market or tiny margin haircuts at any bank.   The yield curve tends to float to indifference levels for future inflation – so if there is $3T or $13T of Treasuries out there, the yield curve will gravitate to levels that discount future inflation.  In general, QE won’t push the market to speculate more due to the mix of assets investors hold.”

These views do not seem that different to lay people, but to investors, they are hugely different.  If you believe the conventional view, QE of moderate size is the equivalent of  pouring gasoline on a fire.  People cannot do anything without cash, and forcing people out of T-bills and 2 year notes into cash makes them spend it on riskier assets.  Riskier assets should embark on huge rallies as QE takes effect.

So we get a commodity bubble, oil prices go through the roof.  Silver and Gold rationally respond by tacking on 50% or so in a year.  As QE takes hold, people will respond by shifting to slightly riskier assets.

Perhaps this conventional view is true.  However, I do know that professional traders and firms prefer to post t-Bills as collateral at the Chicago Mercantile exchange over cash.  T-Bills still pay the bearer money. And the CME treats T-Bills just like cash. So posting a t-Bill or treasury at the CME turns your required margin account into an interest bearing account.

Banks also accept T-Bills as collateral on very similar haircut schedules.

In other words, large speculators – or the firms that hold accounts for small speculators – prefer to post T-Bills instead of cash as collateral.

If you had:

• held T-Bills or Treasuries,
• got “pushed out” of U.S. debt due to QE,
• and thought to yourself, “Now I want to speculate in Commodities”,

the first thing you would do is turn around and buy T-Bills with your cash or short term U.S. debt with your cash.  You’d do this so you could speculate in commodities but still get paid interest.

You can see why I’d think this chain of events doesn’t make much sense.  Why bother speculating?  It probably wasn’t QE that made you speculate in the first place.

The MMT view is that due to effects like this, it doesn’t matter if people hold cash or T-bills.  T-Bills are so close to cash.  T-Bills are “better than cash” for speculation, because they get treated like cash for margining, and still earn interest.

What does this have to do with Oil?  The speculation in oil does not have anything to do with Quantitative easing.  It’s just speculation.  It isn’t supported but a massive U.S. Government program.  It’s just speculation that oil will go up.

The data from the Chicago Mercantile Exchange tells us there is a ton of speculation. If you are going to speculate in oil, the Nymex division of the CME is the place you’d do it.  The conventional view is that QE II is driving this speculation.  But the odds are strong QE II has nothing to do with record speculation.

The fundamentals of oil are not strong.  Maybe the CEO of Exxon is trying to deflect criticism when he says that oil should be at $60-$70 based on fundamentals.  But everywhere you look, there is lots of oil, and moderate demand.

Last time oil was at $60 a barrel, gasoline was at $2.00 a gallon.  If oil prices fall as people realize QE II didn’t force speculation in oil, we could easily see gasoline prices fall dramatically – and in a short period of time.

MMT doesn’t guarantee lower oil prices.  All it says that the current crop of speculation in Commodities wasn’t forced by QE.  The speculation in the markets could be due to people wrongly thinking QE would push others to embrace riskier assets.  But not one person got pushed out of Treasuries and then decided to speculate in commodities.

The TC Curve: Keith Moon Economics

I was out for lunch this afternoon with a friend.  We had a great lunch. It’s the first time I’ve been in a conversation that has been interrupted due to “a call from my gunsmith”.

But during the lunch we were talking a bit, and I expressed to him an idea that’s been brewing in my mind for a while.  What if the fed had a different set of mandates?

What if they threw out those old, stuffy mandates about price stability based on ideas a guy named Knut had 100 years ago?  Instead of these austere, prudent mandates, what if they embraced a Keith Moon style mandate?

Ya know, Keith Moon was the guy who drove a motorcycle down the hall of the hotel, more booze, more drugs, more girls. I guess the modern equivalent would be a Charlie Sheen mandate.

For economics, this would be Maximum Real Growth.

What if the mandate of the Fed and Treasury was Maximum Real Growth? No matter the inflation rate or unemployment pain, what if the job of the fed/Treasury would be to maximize real growth?

There could be a curve that looks like the one above. During our lunch, I drew it on a napkin. My friend wasn’t getting it and this diagram really helped.  It’s that easy to understand.   (It was not Dick Cheney who interrupted the meeting with a call from his gunsmith.)

There should be a tradeoff between inflation and real growth.  Higher inflation produces more real growth up to a point. After that maximum point of real growth, higher inflation produces lower real growth.

This idea is totally different than the potential GDP related to the natural rate of interest.  This is Keith Moon style economics, and seems like a fun idea to think about right now.

Update on The Hyperinflation Hoax – we’re gaining ground!

Great news!  TC is now on the first page of Google results for “shadow government statistics”!  for the post Why Shadow Government Statistics is very, very, very Wrong.  One of the major ways people reach this blog is through a variety of searches for “shadow stats”, “shadow statistics” and such.  It is great to see this on the first page of results.

We do not have hyperinflation.  People that say we do have Hyperinflation are either deluded, or not being truthful with you.   Hyperinflation in the U.S. on May 9th, 2011, is a cruel hoax.   Inflation is about 2-3% at this time.