Dollar's Up, Oil Is Down: But Why? 10 comments
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TV pundits continue to say that the dollar is up because oil is down, while others say that oil is down because the dollar is up. Each of these statements are like saying that I walked to the store and my right foot got there at about the same time as my left foot, the two go together. The correct question where is the body going next. If the body turns around and comes home from the store, both the right foot and the left foot will follow.
The reality is that we only recently turned the body and took a few steps toward the store. Both our right foot and left foot are helping us get there but we have a long way to go. We may zig-zag along the way but the dollar is so low that US assets are very cheap, which means that foreign investors must buy dollars in order to buy cheap US assets.
Oil is so high that finding lower cost substitutes is easy. We have historically used lots of oil because it is a cheap and clean source of energy. When the price jumps so high, other sources become viable until more oil is found. Projects started 3 to 6 years ago are being completed. The Saudis spent about 9 billion dollars over the last 5 years developing one field. At peak production, next year, it will produce 1.2 million barrels per day. This oil will cost the Saudis less than $30 per barrel to produce. It is obvious why they are expanding production at older fields and working on yet another new field.
The Chinese Take a Turn
Over the past 20 years, China has accumulated trillions of US dollar reserves while by encouraging the people of China to work hard and save. In recent months, there has been an attitude change. Why save so much? According to the Carpe Diem web site, the Chinese have started to enjoy the fruits of their labor. Their spending has been helping US exports to soar. It is time to invest in the USA.
The dollar is going up because trillions of dollars are starting to demand US goods. Kudlow is right about "King Dollar" being the key to the bull market. My disagreement with him in recent weeks has been his insistence that US officials should attempt to talk up the dollar or intervene in the free markets to turn the dollar. These interventions only add volatility (risk) to the markets. I say let these markets settle themselves. The invisible hand of Adam Smith is many times more efficient than government bureaucrats.
The last big run in the dollar, from 1995 to 2000, saw a heck of a run in the stock market. Of course! The two usually go for walks together.
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This article has 10 comments:
The dollar will only stabilize when the trade deficit is zero and the government reins in its reckless spending and money printing.
The Chinese buying everything that isn't nailed down floods the market with even more dollars which creates rising prices at home. It's the inflation we created for years finally coming home. In the long term (i.e. 20 years) the flood of foreign money could help re-estabilish a manufacturing base to eliminate the trade deficit. Until that happens, the any new dollars on the market will simply add supply and crush USD/??? exchange rates.
And on another note, the Chinese don't have dollars, they have government debt. To turn it into dollars they need to sell the paper which will push up interest rates which will kill what's left of the economy. The fed would have to buy the Chinese paper to keep interest rates down and then the dollar is toilet paper.
Oil-dollar component is a strong one, so it was natural to see the dollar follow, and will do it in the future too, but not with so much intensity.
I tend to believe that all started from oil rather dollar.
Dollar was at the upper limit of a trading range when on Thursday night Russia invaded Georgia.
Georgia has a bunch of pipelines going through it. Will US threathen Russia if it stays ala Afganistan? Will we go to war to support Georgia?
A violent pullback in driving ensued, I call it "can't afford or priced out", the newly self styled "Greens" prefer "conserved".
The dollar gained dramatically.
The Town Crier has just passed through--"One week and gas is down 15 cents!!" he happily proclaimed.
How many newly anointed "Greens" will see fit to slip off the wagon?. Some certainly, enough to effect reserves and turn the price up?? We shall see. And the pendulum shall swing in diminishing arcs till the balance is reached.
Will that change the price of oil?? Yes in the short term, No in the long. Without alternatives or new fields coming on line, Oil is performing the final act. Between now and the curtain close the price can "ONLY" go--($$)--you be the predictor! this page has enough past event experts.
Will that change the dollar, you betcha last gallon.