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Thursday August 25, 2005 - 11:35:33 GMT
Black Swan Capital - www.blackswantrading.com

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Money moving "stuff"

Quotable

“Everything’s got a moral, if you can only find it.”

Lewis Carroll, Alice’s Adventures in Wonderland



FX Trading

Besides the market, there are plenty of other things that keep us humble each day. One of them is the intelligence and wit of the many readers of this publication. Here’s an example of what I mean.

Yesterday’s topic pertained to the ongoing and tight correlation between the British pound and crude oil. One of our many astute readers (it is always humbling to know there are so many people in the world that are that much smarter than you) responded with this tidbit that you might find interesting:

“I have at times wondered if perhaps oil may be taking the currency disciplinary role that gold played in monetary history. Like gold once was, it is considered universally valuable, it's fungible, and strategic to every nation’s security and economic prowess. And now there seems to be little, if any, surplus productive capacity to produce, refine, and distribute to a growing global economy. Oil may be the only alternative strong enough to wage battle with the dollar. Black gold may be the new gold.”

In the weekly chart below, you can see how crude, gold, and the dollar have acted relative to each other. What stands out initially on the chart is the mid-2000 into late 2001 period. It represented the collapse of the financial shell game in America—and end to the “internet startups will obsolete the rest of the world” fantasy. The Nasdaq’s demise ushered in a whole and real concern for Mr. Consumer. That was the cue for Uncle Al and Co. to get busy lowering that Fed Funds rate. “Deflation on these shores we will not have,” seemed the mantra.

Chart


Well, the Fed team staved off deflation—as commonly defined, thanks to effective free money at 1%. This new era of Fed accommodation ushered in a new theme, I think coined by Jim Grant: “Out with paper and up with stuff.” For Mr. Grant, wise beyond imagination, realized Fed largess might not show up in standard inflation numbers—but the real inflation would come in the form of commodities—the money had to go somewhere. And if the stock market isn’t the major recipient of free money, then stuff it is! (Investors were a bit chased after watching their Nasdaq portfolio evaporate; obviously Dow 36,000 is on hold.)

So, the “era of stuff” has been good for crude, gold, real estate, copper, zinc, etc. But as we know, era’s come and go—but “it’s different this time” with crude oil, they say. Hmmm…that phrase rings all too familiar…

The difference this time is Peak Oil. Well, maybe. It makes sense. The fact that God endowed the earth with the most crude in the worst geopolitical hotspots on the globe probably adds to the equation (man probably had something to do with some of those problems too). But, we don’t have time, nor does your editor have enough depth, to get into either topic with any degree of satisfaction. So let’s stick to the “era of stuff” as it relates to the monetary side.

On the monetary side, we have one primary variable to work with: Fed Funds. Why? The US Fed seems to have become the world’s defacto central bank, whether the world likes it or not.

Chart

The questions, to which we have not an answer, are: To what degree is this move in crude a monetary phenomenon? Sure, the Fed move was a catalyst for real growth. But how much of this move in “stuff,” and not just crude oil, was money sloshing around in the system that found and convenient home and led to a self-feeding price rally with rationales attached to justify said rally along the way?

Ahh…Once again it all leads to more questions. But we do know the Fed’s accommodation is ending. We just don’t know yet the impact on stuff.

Jack Crooks
Black Swan Capital

 

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