Funny how the market reads things when it comes to oil prices...
...Obama comes out and says offshore oil drilling will occur, and just when you think this promise of extra supply of oil on the market will factor into the supply and demand equation, oil prices sky rocket, instead of go down. Same thing happened when 'cash for clunkers' passed, I thought there would be a drop in demand as a result but nevertheless oil prices still went up also!
The only thing you can conclude here is this:
The market thinks that the recovery and the demand for oil (by China as well as overall) will far outstrip both the supply that will come online vis. a vis. the extra Obama offshore drilling AND it will far outstrip any conservation efforts to curtail the demand on oil. In other words what oil is telling us is that we are in for one heck of a global turn around...OR....
It's telling us that the dollar will weaken SO much that oil prices will inflate into the stratosphere. OR both.
But here's the crazy part. Amidst all of this spending and brouhaha, the dollar has been gaining ground (strengthening) like gang busters, presumably because the other countries are experiencing even HIGHER inflation than the U.S. (as was the case when the EU announced its high inflation of late). Now if that wasn't crazy enough, it gets crazier still...
...all during the crises of various kinds (Greece, recession, yada yada), people all around the world have been buying treasuries. That pushes treasury prices up (yields down). Got that part? Yes, yields down, which encourages our govt. to borrow even more, why not? If you're paying nearly no interest, why not take this opportunity to borrow more. But isn't that nuts that the world is willing to lend, even when they themselves are all borrowing also? In fact, every country, except China, is borrowing left and right, and it would appear only China is doing the lending.
But wait, it gets crazier still. In order to keep its currency weak and pegged to the U.S. dollar, so that it can continue to export goods to the U.S. cheaply, China must constantly flood the market with Chinese Yuan by selling it in exchange for U.S. dollars. So China is picking up tons of U.S. dollars (both from the sale of its goods to the U.S. but also from the sale of its currency), and what it does with all of these U.S. dollars is to buy more U.S. Treasuries, which only encourages the U.S. to borrow more, since that pushes interest rates down, AND oil and other commodity producing properties.
Cheap imports from China into the U.S. also keeps the price of goods in the U.S. down, and hence keeps inflation down. That means lower interest rates still (or put another way, China is importing our inflation!)
Now, if China is buying U.S. and pushing interest rates down AND it is weakening the Yuan currency at the same time, then China's return on investment is really negative (it loses because of the low currency and low interest rates it gets in the U.S. when it could get the much higher interest rate in China). So who gets hit with the negative interest rates? Chinese tax payers. But as long as China is creating jobs, the tax payers don't mind participating in this ponzi scheme.
But WAIT! China is offsetting its losses in its U.S. treasury investments with its positive returns in investments in oil producing properties, which it knows will appreciate given China's appetite for oil and commodities.
That will send oil prices higher...and it is all caused by China.
Where will all of this end up? Well, the tipping point will be when China finally saturates its labor market, but with billions of people to provide jobs to, this could take several years still. But man oh man, I don't think I want to know what will happen when the ponzi scheme collapses. Who is going to save China and the U.S., when the two govt.'s are too big to fail themselves?
Krombacher
