Thursday October 6, 2005 - 11:20:40 GMT
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Black Swan Capital - www.blackswantrading.com
Oil and the Dollar
•Industrial output in the UK marked its sharpest fall in five months during August. (BBC)
•In terms of the substitution effect, China’s coal market is key. Ample statistics and anecdotes suggest that China’s coal supply is plentiful again and the forced increase in oil demand due to coal shortages last year is over. (Morgan Stanley)
•Japan's Topix stock index fell by the most in almost six months. (Bloomberg)
•Key reports due today (Global-View.com):
11:00 GMT/7:00 EST- UK- BOE Policy Decision
11:45 GMT/7:45 EST- EU- ECB Policy Announcement
12:30 GMT/8:30 EST - EU- ECB Policy Press Conference
12:30 GMT/8:30 EST- US- Weekly Jobless Claims
12:30 GMT/8:30 EST - CDA- Aug Building Permits
14:00 GMT/8:30 EST - CDA- Sep Ivey PMI
“The income redistribution due to high oil prices is significant. The current oil prices are about US$24/barrel higher than last year’s average. At a production level of 85 million barrels/day, oil producers receive US$2 billion/day extra. If the current prices last until year-end, the average prices for 2005 would be US$17 higher than last year’s, giving oil producers a US$527 billion windfall.”
Andy Xie, Morgan Stanley
Is the rise in crude good for the dollar in a round-about way? It seems so.
Chart: Crude vs. US$ Index Daily
Thus, the decline in crude may be bad for the dollar—in a round-about sort of way. For quite possibly crude prices still maintain an element of demand despite being lately it’s “all about supply.” It’s through the demand side, from a macro standpoint, that one can most easily draw the oil-dollar correlation. (Granted, a supply shock could play a role. But our short story today is about demand.)
Rising oil prices “automatically” feed into inflation is the mantra like drone of the financial press. Wrong!
Bloomberg’s Caroline Baum over the years has battled this cost-push notion to no avail it seems. She tries again in a recent piece [our emphasis]:
“One of the most tenacious myths in economics is the idea that costs push prices, and the price level (inflation), up. The idea of ``cost-push'' inflation implies that producers are content to charge the same price, day in, day out, until one day a bell goes off to alert them that their costs of raw materials or labor (wages) have gone up.
“Golly, gee, these costs are killing me, our average businessman opines. I'm going to have to raise my prices.
“There is something intuitively appealing about the idea that costs push prices up. The fact that it's incorrect does nothing to limit that appeal.”
It’s all about demand, writes Baum:
“While it may appear as though ‘increased raw material costs have caused a higher final product price, the actual cause of the higher prices at every level of the manufacturing and distribution network is the initial increase in aggregate demand for the final product,’ Batten said. (Bear Stearns Economist Sandy Batten said that in 1981 in the Federal Reserve Bank of St. Louis's June/July Economic Review.)
“And increased economy-wide demand is a function of an increased supply of money relative to what the public wants to hold (money demand).
“You get the drift. It's always convenient for governments to shift the blame to ‘greedy businessmen, grasping trade unions, spendthrift consumers, Arab sheikhs, bad weather, or anything else that seems even remotely plausible,’ said Milton Friedman, Nobel laureate in economics.”
Warning: A convoluted sentence to follow.
Maybe rising oil prices, led by global demand, enriching oil produces with a windfall of $527 billion estimates Mr. Andy Xie, who recycle those dollars back into the real economy, stimulating demand, helping China, who recycles money back to Treasuries, is boosting the buck.
And if global demand is a function of easy money, we have to think a “successful Fed”, now sporting its “price stability” hat, might dampen said demand and flow of money to oil producers… Is that a feedback loop?
It’s all so darn confusing. Economics it is. Economic “Science” it is not.
Black Swan Capital
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