You’ve probably already heard by now that President Obama is unleashing a wave of oil onto the marketplace in one fell swoop just in time for the summer vacation season. If you believe that lower prices at the pump will spur economic growth resulting in more jobs, you may be right, then again you may be wrong. Dave doesn’t know.
What Dave does know is that systems don’t like shocks. You shock a system when it’s your only choice. If someone’s heart has stopped, you shock them. If you shock someone enough, even if they’re perfectly healthy it will eventually destroy them.
The decision by the Federal Reserve to engage in quantitative easing was an elaborate and stimulating process for supporting the heartbeat of America. Dave likes to think of it as artificial sweetener for the wholesale end of the economy – the bulge bracket banks. Cheap gas prices is like a sugar high for the economy. It’s the equivalent of stopping into a convenience store and buying a five hour energy drink. There’s no doubt that you can feel it and if it costs $45 to fill up your car instead of $60, that’s $15 you can spend on snacks and apps for your Iphone.
Dave is pretty sure that the White House strategic objective is to maximize the impact on the price of oil because rather than phasing in the oil sale, it’s being dropped on the marketplace all at once. Why else would you do something like that? Anytime you make strategic decisions with your strategic reserves the question is, will you get the desired result or will there be unintended consequences? But Dave believes this is not a strategic decision. This is tactical and understanding the difference between strategy and tactics will make all the diffference.
You see strategy (or strategery as it was known in the Bush White House) is the big plan while tactics are what you do along the way to keep your overall strategy on track. Think of it as a James Bond movie. The strategy is to save the world from Doctor Doom and hs nuclear tractor beam, but the tactics that are employed may envolve a fountain pen that turns into a helicopter or an Aston Martin that sprays an oil slick out of the exhaust pipe. Those tactical responses are simply part of the means which justify the end.
When you use strategic assets to solve tactical problems is when you can find yourself in a sticky situation or discover that you have ventured out onto a slippery slope and are unable to return to your original strategic plan. Look at it this way. Let’s say you have two IOU’s. One is for your house and it’s a loan that is secured by the property while the other is a credit card. If you lose your job or become sick and choose to solve your tactical objectives of maintaining a high credit score and keeping your credit card current with its payments you just might lose your home which could create a much bigger strategic issue such as homelessness.
If you’re the president of the United States and you just entered into a war and decide to release strategic oil reserves because there is an interruption in the global supply chain, your strategic objective and your tactical objective are working in concert with each other. On the other hand, if you’re James Bond and in your effort to stop Dr. Doom you drive your Aston Martin into the center of the nuclear reactor you may save the planet, but you destroy the entire James Bond franchise. That is an example of a tactical maneuver undermining the long-term strategic objective of selling movie tickets.
The strategic objective of the White House would seem to be related to economic stimulus with a focus on jobs in light of the ending of QE2 and the implementation of the Twist plan (http://tradewithdave.com/?p=6968). The tactical implementation is to lower the monthly percentage of income that is spent on fuel thereby boosting consumer spending, the transports, airlines and the all-important summer vacation season. There’s one huge problem with that.
Timing Is Everything
If you wanted to boost the summer vacation travel season, you would have needed to lower prices at the pump by Valentine’s Day or at least before Easter. Middle to late June, although many schools just got out, is too late for consumers to respond with changes to their summer vacation schedules. Sure some folks may decide to fill their boat up and go offshore or others may take a day trip that they had not planned, but that big road trip to Florida to visit Mawmaw and Papaw was probably planned last Thanksgiving 2010, not this 4th of July.
If you want to change the consumer patterns of American households, you have to change the consumption patterns of the great American mother and wife. If there’s one thing that moms hate more than anything, it’s shocks to the system. A mom is the greatest single shock absorber that has ever been in existence since the begining of time. It’s moms that take twenty-eight days of pay and stretch it into thirty-one days of month. It’s moms that made Hamburger Helper a household name. If you want to avoid unintended consequences then whatever you do, don’t shock mom or she just might shock you back.
Federal Reserve Chairman Ben Bernanke said it himself this week that “we don’t have a precise read on why this slower pace of growth is persisting.” Dave doesn’t know if the IEA’s spilling of strategc oil reserves will have the intended effect, but Dave does know why there’s no growth. Cause Momma ain’t happy. When you mess with Momma’s vacation plans all winter and then at the last minute you drop the price of gas to convince momma that the family should go to the beach for three days, you’re going to get a heapin’ helpin’ of her stark reality.
If the cornerstone of fiat currencies is confidence, then the walls of the house are built from expectations. Shocking the system, however politically expedient it may be, is not good for expectations. It perverts the price discovery process and takes the already rigged markets and turns them into a circus. Wal-mart may be a great beneficiary of the spilling of these oil reserves into your change purse, but just because Mom doesn’t run out of money before the end of the month while standing in the check out line doesn’t mean that she’s going to run out and spend money on a vacation at the last minute. On the contrary, she’s going to spend that money on basic commodities and products that she needs to run her home such as soap, clothes and food.
That’s where the unintended consequences start to enter the picture. When you attempt solve a strategic problem (near zero growth and rising unemployment) through the tactical deployment (vacation gas money) of a strategic asset (petroleum reserves), you are displaying your vulnerability for the entire world to see. That would not be such a big issue if at the same time you were engaged in a new or highly visible “kinetic” war (Dave doesn’t think Libya or Afghanistan are understandable enough to qualify). The loss in confidence created by showing Granny’s bloomers would be offset by the show of force related to the war effort, but this oil sale is different.
This effort appears designed to boost confidence when in reality the effect will be just the opposite. Confidence will continue to be destroyed and the plan to deploy annual inflation rates of 4% in an effort to inflate away the debt runs the risk of becoming a runaway train driven by a rapid decline in confidence of the U.S. dollar and the realization by the average American consumer that their purchasing power is evaporating which could unleash hyperinflation in areas that are considered life essentials such as food, clothing, shelter and water.
In the same way that the Fed admitted they don’t understand what is happening, the entire system is built on dollar confidence and although we are experencing a near-term strengthening of the dollar today, should that confidence begin to fade, the release of hyperinflation on targeted, life-essential areas will break out as consumers search for alternatives to their dollars and the diminishing status of the U.S. dollar.
But that’s the Fed’s plan… to inflate a way the debt…. then what’s the problem? The problem is what happens when confidence in the dollar cascades into deterioration at the same time that the Fed’s orderly “twist” targets select maturities and rates. This slingshot that is being loaded and drawn back right now is resulting in a strong dollar and a pull back in prices of stocks. This is the same slingshot that will release the explosive sugar-induced high that such desperate tactics always bring. Once the general public begins to understand that the options now available to the Fed and the Treasury, especially the Treasury’s Exchange Stabilzation Fund are all just one more table spoon of sugar, what other options are left for Mom in her effort to survive the summer while riding herd on Dennis the Menace except to get out in front of that sugar high by spending every last dollar she has before her purchasing power is destroyed.
A Willingness To Manipulate
Confidence is essentially based on trust and trust is essentially based on a combination of credbility and integrity. Just because someone is honest doesn’t mean that they are credible as is the case with most Dennis the Menace characters. Their heart may be in the right place, but when it comes to executing on the plan we know as well as Mr. Wilson that the outcome will always include unintended consequences.
The White House’s willingness to offer a temporary tactical solution to what is a fundamental strategic problem displays a willingness to engage in market manipulation at a level that does not allow for the conventional finger-pointing of Bernanke made me do it. If the Suez Canal was blocked or if we had just invaded Iran, then spilling the equivalent of one day’s supply of oil onto the market would be viewed as a responsible security action. However, in light of the timing of the Fed Chairman’s speech combined with the China-friendly by-product of lower oil prices the blatant market manipulation not only smacks of being politically expedient it will, in the end Dave believes, undermine confidence.
Legitimate price discovery is a confidence builder while market manipulation is a confidence destroyer by causing those who would otherwise particpate in the price discovery process to otherwise pull in their horns and create an unwanted run on the physical currency. It will have the same effect on the energy markets that high frequency trading has had on the equity markets. It will shrink the overall base while energizing the overall volatility. That is a formula for financial crisis which may be exactly what the government is looking for as their plan (b) should this high fructose injection fail to produce the Splenda results they are looking for.
The Call With Dave
Dave has been considering making another call on the market for about three weeks. The last time he made a call it was on February 18. The timing was great, but the call wasn’t perfect but has worked out well as of the past couple of weeks (http://tradewithdave.com/?p=5372). Keep in mind that not only is Dave not perfect, he’s also not a financial advisor and he only trades in ideas, not petrodollars. Well, here comes another call. Dave is naming this next phase the Slingshot in the Arm of Inflationary Essential Goods and Services, aka the Dennis the Menace market of unintended consequences, ricocheting through the global neighborhood and ending up breaking a second floor window on Maple Street USA.
It seems obvious to Dave that not only is the White House willing to offer sugar and caffeine infused beverages to your young children just before bedtime and the launch of the summer vacation season, they are willing to offer the same thing to the Chinese as a stimulant for cooperation. When you use a strategic asset in a tactical manner as any parent of small children knows the price you pay in the end is much greater than the cost on the front end. Allowing the kids to stay up and be stimulated not only involves the grouchy hangover the next morning unchecked it will lead to a mouthful of cavities, childhood obesity and diabetes. The same can be said of the energy markets, including natural gas one of the biggest inputs for the world’s food supply of nitrogen-based fertilizers.
You see the China inflation story is just getting started and now that we have a globally integrated food supply to go along with our globally integrated banking system, when your little Dennis sits down to his bowl of Corn Pops he’s competing with his Chinese counterpart who is equally hungry although he may be a newer member of the consumption class. Once you’ve presented free will as a choice between Coke & Pepsi, water is no longer an acceptable substitute. Here’s a report out of Societe General that explains the global breakfast cereal eating contest better than Dave ever could: http://www.scribd.com/doc/56479179/China-Domino . Soc Gen refers to them as dominos while Dave prefers to think of them as so many smooth stone slinghot propelled projectiles ricocheting off oak trees and heading towards the enrichment of Keynesian window repairmen right here at home.
The Deflationary Drawback
You know that phase of slingshoting where you drawback the elastic in hopes that you won’t hit your thumb with a stone moving a 90 miles per hour? Well that’s the phase we’re entering into now. It will be short-lived (say the summer vacation season) only to be followed by an elastic rebound of rapid proportions into a hyper-inflationary state targeted on life essential items that feed both corporations and the entire HenryMitchell household. Select items will be artificially supressed such as gold, silver, now oil and any other items that make up the redefined basket of inflationary measurement tools (http://www.tradesignalonline.com/charts/news.aspx?id=815113&filter=&catid=0 , while everything that matters (the Corn Pops for example) will explode into a hyperinflationary cascade designed to outrun the engineered Twist plan to gradually squeeze the life out of the U.S. dollar (http://tradewithdave.com/?p=6968). The artificial inversion of yield curves and the implementation of curbs on select Treasury maturities is an equally destructive form of manipulation that may not affect oil speculators directly but it affects Grandma and is ultimately her tax for doing everything right.
So Dave is officially joining the hyperinflationist camp but there’s good news. The hyperinflation will also apply to the price of equities… at least for a season. That’s right. Stocks of globally sophisticated corporations (thnk GE, Catepillar, Boeing, etc.) will also see their prices rise rapidly along with the price of everything else. How can this happen if the world is struggling to recover. It will happen because money will go in search of any asset class that even comes close to displaying any shred of productivity… at least for a season (probably for a year or two). Where else can the money go? The wage parity with China will look promising as jobs return to the U.S. until we discover that the key jobs exported in the 80’s are being repatriated to robots in what Jeremy Rifkin called The End of Work.
So the price of everything with the exception of whatever the U.S. and complicit governments are able to manipulate (think dollars, interest rates, precious metals and petrodollars so far) will begin a rapid ascent not due to fundamental dollar strength which is what we witnessed this week, but rather through an effort to outrun the manipulator who has plans to destroy the dollar ultimately. Dave wasn’t the originator of the saying “If Momma ain’t happy, then nobody’s happy,” but Dave is a big believer. The White House may think that providing a tactical form of tax relief at the pump for Mom is going to be pleasing to her. They also may believe that it will boost sales at Wal-mart because mom doesn’t run out of dollars before the end of the month. But all that assumes that Wal-mart will continue to have everyday low prices which unfortunately for Mom, Dad and Dennis will no longer be the case.
By the time the back-to-school season comes around, everyday low prices will be everday high prices and it won’t be long after that when Alice Mitchell discovers that the globalization slingshot that Dennis shot over a decade ago has managed to travel around the globe and come back in the form of a rock through her window when her dollars won’t even buy a vowel much less a shopping cart full of groceries.
Here’s a link to the IEA’s press release: http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=418
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