Thursday, June 25, 2009

Fed Knows Inflation is Coming; Oil Supply Slips Again

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Fed statement yesterday afternoon didn't fail to disappoint - unless of course you expected intelligent insight and rational thinking about the economy. The Fed said "the pace of the economic contraction is slowing". In other words the economy is still getting worse, but it is getting worse at a slower rate. It did admit that "economic activity is likely to remain weak for a time". And this is why the Fed is as confident as it always is that "inflation will remain subdued for some time". So of course, it can print all the money its wants to and unlike every other time in history when this has happened and resulted in massive inflation, this time is different. I wonder if they sit around and chuckle when they write these statements.

To be fair the Fed did not say there would be no inflation and the 'some time' they mentioned could be the next two weeks. Whatever the time period is, it won't be that long. The Fed admitted it would be purchasing up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, plus $300 billion of Treasury securities 'by autumn'. Those treasuries will almost certainly be longer dated paper, since China and Russia are lowering their purchases of these and moving to the short-end of the curve. Foreign governments also dumped their Fannie Mae and Freddie Mac debt, which is why the Fed now has to buy this worthless paper. But don't worry, the Fed "is monitoring the size and composition of its balance sheet". So how could they not know lots of inflation is on the way?

As has been the case since the Credit Crisis began almost two years ago, the U.S. dollar rallied on the news that the government is debasing the currency. The mainstream media was out in full force with articles trying to bull the dollar up (I wonder if they get a commission for this). Early in the day, headlines screamed "Dollar Gains Ground". I checked and the trade-weighted dollar was up 0.15, a normal insignificant intraday move. Right after the Fed's press release, "Dollar Rises After Fed Statement". It was barely up at the New York market close at 4:00PM. These reliable logic defying dollar rallies around Fed announcements can only be explained by some form of government manipulation of the currency markets.

The oil storage report came out yesterday and at first I thought the EIA reprinted last weeks numbers. Oil inventories fell 3.8 million barrels, below expectations just like last week. Gasoline inventories however rose 3.9 million barrels and this was way above expectations, also just like last week. Oil supply has fallen enough in the last six weeks that the media is no longer saying there is a glut (there never was, they were just saying this). They may soon be saying this about gasoline however. Oil closed yesterday at 68.67, little changed.

NEXT: More Numbers that Just Don't Add Up

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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