Bernanke steals OPEC’s power
Today's Financial News - Posted December 17, 2008
OPEC is meeting to discuss a major production cut. It’s goal is to boost prices back to the $75 level it deems fair. What it does not realize is the Federal Reserve has much more power than the cartel could ever dream of. Prices may rise, but it will not be because of an OPEC cut.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore—(TFN): It is a tough pill to swallow, but OPEC is finally realizing the Federal Reserve has more power over oil prices than the cartel ever has. OPEC may be able to use some muscle to put pressure on crude prices, but when it comes to the heavy lifting, nothing gets futures moving more than some monetary action from Bernanke and his troops.
By now, you have heard the Fed dropped overnight interest rates to record lows. With a target range of 0% to 0.25%, loans from the lender of last resort are downright cheap. The surprising move has made waves throughout the economy.
Mortgage rates dropped to levels not seen in decades, the prime rate is ultra-low, but most importantly, the dollar weakened and the interest on Treasury notes dropped to record levels.
This old mule ain’t what she used to be
As I write, the dollar is sitting at 11-week lows. Once again it takes $1.43 to purchase one euro. A little further east, a dollar now only gets you 87.44 yen. So much for the notion of a strengthening dollar helping to pull us out of this mess.
Even worse, a weaker dollar feeds the crude-market bears. As the currency of choice in global energy trade, a weakening dollar means foreign producers have to charge more in order to rake in the same profits.
There is a good chance Bernanke’s move yesterday, which sent shock waves throughout the currency market, will have more of an impact on oil prices than OPEC’s production cuts this week.
The only variable in the equation will be the American consumer. If we are not willing to pay more for our crude and demand continues to slip, producers will have no choice but to accept lower prices. That means countries like Venezuela and especially Russia, which are in a state of financial disaster due to plummeting prices, will feel even more pain. Read more on that theory here.
If demand for crude begins to level off or even rise, however, we could very easily see another rally in the crude markets. A drastically weakening dollar, thanks to a flood of Fed-induced liquidity, combined with a resurgence in demand could take prices back to the $75 mark, exactly where OPEC wants it.
Here is what you need to watch:
First, the Fed promises to go on a Treasury note buying spree. By purchasing huge amounts of government-backed bonds, Bernanke believes he will keep interest rates low and spur lending. Unfortunately, businesses and consumers are unwilling to take on any financial risk.
They do not are tempted by the cheap loans popping up all over the place. The lack of demand is throwing a major wrench into the Fed’s spokes.
In reality, all the Fed will do by purchasing Uncle Sam’s debt is add even more pressure to a dam of liquidity. Eventually, the dam will break and money will seem like it is falling out of the sky and of course, the dollar will weaken even further.
The Fed better not be caught sitting on its hands if it happens or the mess could spiral out of control. If this happens, crude at $75 will seem like a bargain (so will a gallon of milk for $8).
A sharp rebound?
Also, keep an eye on fourth-quarter earnings figures. If this recession is not as weak as many analysts predict, Bernanke will look like a fool for yesterday’s move. If the fickle American consumer suddenly gains confidence and spending soars, any notion of deflation is going to vanish overnight.
The markets want a quick fix to this economic crisis. Free markets do not reach equilibrium in one instantaneous move. It takes months, even years, to wash away the dirt of created by an over-fueled economy.
Unfortunately, our leaders insist in meddling with the situation in hopes of finding a magical quick-fix. All they will do is create more problems and variables for investors to overcome.
As one of those investors, you need to be prepared for every conceivable outcome. Hedging has never been more important than it is right now in this unpredictable market. I have outlined some options hedges over the past few weeks and have even written a report based on using gold to hedge your portfolio. You can read it here.
One thing is for sure, traditional buy-and-hold investing will not provide you with the kind of gains you need to survive in this market. Whenever the government and its bottomless bank account are buying the same kind of investments you and I rely on, you know there is bound to be trouble.
Next Article: It’s time to buy Isis Pharmaceuticals (ISIS)
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