Tuesday, Jan 20, 2015

Watch the Fed RAISE interest rates

Reuters: Petrodollars leave world markets for the first time in 18 years

Low oil prices mean that petrodollars are no longer being recycled (oil producers are even sucking money out) into western/US financial assets. Global liquidity will fall, leading to higher borrowing costs, and the Fed will have to look for new support for stock /bond/ asset markets and for the dollar's reserve status. The only tool available to it is higher short-term IRs despite the weakness of the economy (deflation, slow growth, stagnant wages, falling lab force participation). The Fed has made loud noises in this direction lately, and the reduction in US current account deficit gives it some leeway for a rise. Good for US assets, G Sucks and JPM, very bad for the emerging markets (remember 1997) with big dollar-denominated debts and more capital flight.

Posted by icarus @ 03:24 PM (3620 views)
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1. hpwatcher said...

Slap in the face for certain persons.

Tuesday, January 20, 2015 03:26PM Report Comment

2. Crunchy said...

It's a shame that low oil prices don't translate very well to the pumps, it might actually do the global economy some much needed good.

Wait for some sabre rattling for a low buying opportunity or the $30/35 mark. Simples!

The Grand Old Duke of York, he had ten thousand men.....

Tuesday, January 20, 2015 08:01PM Report Comment

3. quiet guy said...

Thanks for posting Icarus. The macroeconomic surprises seem to be coming in pretty fast at the minute! The one thing about the proposed timing of a (modest) interest rate rise is that it will impact the next US Presidential election. Or maybe the Fed don't care.

Another take: http://www.counterpunch.org/2015/01/20/are-plunging-petrodollar-revenues-behind-the-feds-projected-rate-hikes/

Tuesday, January 20, 2015 09:00PM Report Comment

4. reticent said...

Great post, Icarus.

Black swan on the horizon it seems.

Wednesday, January 21, 2015 07:21AM Report Comment

5. libertas said...

Hmm. I think FED will have to cut rates to try stem the rise of the dollar, and protect the pegs others have with it. Yes, it wants to raise rates, but it is not in control of global capital flows of this magnitude.

Wednesday, January 21, 2015 07:40AM Report Comment

6. icarus said...

quiet guy - yes, that's well worth reading. I didn't post that one because it went into too much detail about the US economy, the ins and outs of Fed announcements and other knock-on effects of low oil prices to interest most people on this site, who might be more interested in the petrodollar recycling and interest rate implications of the oil price.

libertas - "Fed is not in control of global capital flows of this magnitude". Shadow banks, and the ultra-high-net-worth individuals whose money they invest, control most of those capital flows and they hunt in packs, destabilising markets and causing the kind of price volatility from which they make quick gains. Packs need leaders and signals and the Fed provides both. The BRICS and other parts of Latin America were seeing huge growth in their real economies and financial assets from 2009-2013 as a result of QE/ZIRP. Emerging economies grew thanks to China's huge fiscal stimulus - providing a big market for commodities - and to the free money from the Fed/BoE which was invested in the BRICS/Latin America because of the higher returns there than in the advanced economies, which weren't stimulated by the monetary injections). But as soon as the Fed announced the tapering of QE and the possibility of IR rises early in 2013 the money flowed back to the US and Europe (into US stock and bond markets, London property and southern European sovereign bonds) and away from emerging markets (currency, stock market, real economy declines, IR hikes in vain attempt to stop the hemorrhage).

Wednesday, January 21, 2015 11:08AM Report Comment

7. libertas said...

Icarus, yes and no. If the ECB is the leader of the pack right now, and dollar pegs are at unilateral risk, the Federal Reserve will be in reactive mood for the foreseeable future. Fortunately for the dark pools of liquidity, the Fed is owned by the Bank of International Settlements, which also runs ECB and BOE on behalf of said dark pools, so the dark pools will remain satisfied. As for the American people, does anybody care?

Wednesday, January 21, 2015 01:50PM Report Comment

8. landofconfusion said...

Maybe I'm being stupid here but I thought lower liquidity = lower prices = deflation.

And If money is leaving the market what's to stop the Fed from simply using that as an excuse to print more?

Wednesday, January 21, 2015 02:51PM Report Comment

9. icarus said...

landofc - Or, if money is leaving the markets what's to stop the Fed raising IRs to attract investment into dollar assets/markets to offset the loss of petrodollar investment in those assets?

libertas - the Fed is reactive only insofar as it's got to react to the drying up of petrodollar investments. It's acting on behalf of Wolf Street and it knows there'll be winners (aforementioned Street) and losers - banks and corporates (rather than sovereigns) in emerging markets and, as you say, the American economy/people. As the article in quiet guy's comment points out, the Fed has played this hand before - but this time it's different in that the emerging economies that will be hit form a greater proportion of the world economy nowadays.

Wednesday, January 21, 2015 05:14PM Report Comment

10. landofconfusion said...

icarus - I don't quite see how that would happen.

While the loss of petrodollars will cause capital loss it will also cause liquidity shortages, which is deflationary. Added to that there are problems with falling asset prices and currency crises in various petro-states, which are very much feeling the pain of falling oil revenues. It's been my experience these things are more likely to force more capital into the worlds reserve currency thereby making it stronger and therefore an interest rate rise less likely.

But that all said, what might happen if everyone got used to low oil & asset prices and then suddenly Saudi Arabia et al decided to slash production? Might be very interesting, especially given falling levels of unemployment and rising wages.

Wednesday, January 21, 2015 06:03PM Report Comment

11. icarus said...

landof - There are opposing tendencies and opposing interests. If there's deflation you wouldn't normally look for a hike in IRs, especially if growth is slow, Treasury yields are low and the supposed aim is to boost inflation. (Though the Fed claims that an IR hike is likely because of the strength of the US economy.) It's true (see my post @5) that capital is already flowing (back) from petro-states and other commodity producers to the west and the low oil/commodity prices will enhance this tendency and the dollar's strength. But how important is the opposing tendency of the drying up of petrodollars, and to what extent is this a threat to US/western asset prices and dollar hegemony? A Fed rate hike would also cause mayhem in emerging markets but this would be another opportunity for Wall Street to buy their assets on the cheap.

Thursday, January 22, 2015 10:42AM Report Comment

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