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Bruce Krasting

Bruce Krasting

I worked on Wall Street for twenty five years. I was an FX trader during the early days of the 'snake' and the EMS. Derivatives…

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Will Oil Break Out Soon

Jon Hilsenrath (WSJ) has yet another article on Fed propaganda to ease the way to QE-2. Today it was Chicago Fed boss Charles Evans doing the talking. He is in love with the Fed stuffing its balance sheet further.

He favors "much more [monetary] accommodation than we've put in place."

It’s hard to imaging being more accommodative than the Fed is today. We have ZIRP. We have nearly daily POMO. Rates have never been this low. Ever. We have broken some golden rules on monetization. And Evans thinks we need “much more”?

The Fed might aim to overshoot its informal 2% target for a time to make up for lost ground, Mr. Evans said. "That is a potentially useful policy tool at this point and I definitely think we should study it more,".

All the Fed heads are talking about the need for more inflation. This is nuts. The Fed is in a tiny box and saying, “Deflation is BAD”. If that is true then the opposite, “Inflation is GOOD” must be true. That logic is going to backfire.

There is possible bright side to this. Judging how quickly markets adjust I think there is a possibility that in a relatively short period of time, say the next four months, we have a shake out in oil. It would not take much. All the pieces are there. There is economic growth globally and the dollar is being trashed by the Fed on a daily basis.

I don’t think the average American gives a damn about the dollar. But they care very much about the cost of gas. If we get a price break and the pump says $4.00 and heating oil is $3.00 there will be a backlash. On a broad basis people will be angry. The economy will suffer. Our trade balance and current account will deteriorate. GDP will decline.

At that point the MSM will look for answers. They won’t have far to look. They can blame Mr. Evans or Mr. Bernanke. $120 oil and $4 gas will be brought to you by the Fed. From Hilsenrath’s article, the understatement of the year:

It could be a challenge for the Fed to explain such a strategy, and to convince the public that it wouldn't allow inflation to get completely out of hand.

I can’t wait for Fed officials to explain to Congress and the American people why trashing the dollar and raising the price of energy is good policy. They won’t be able to.

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By. Bruce Krasting


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