Friday, May 27, 2005

oil and the conundrum.

.
imagine the interest rate as a tide. the recent 1% rate
was the high tide of liquidity, and the tide is now going
out again bit by bit as greenspan raises the rates.

now imagine smaller fluctuations in day to day shares
and other investments as waves, over and above the
underlying ebb or flow of interest rates.

now imagine the hedge funds, offshore investment, oil
money and foreign central bank purchases as a huge
tsunami on top of both, which when moving in one
direction can go against the tide or even appear to
reverse it.

that is the conundrum.

the tsunami is no longer responding to alan greenspan.

it responds to the fed interest rate only in relation to
what is happening elsewhere. it lives in an ocean of
globalised investment opportunity, and massive liquidity.
most of all it responds to what it, itself, is doing. this is
not the world of waves and tides - but tsunami and bubbles.
the computers that help to drive it have neither allegiance
nor conscience.

if this analysis is correct, what will be the impact of the
tsunami ? the loose or hot money that flowed in so freely
can flow out again. the second toll of devastation is as
the tsunami rolls out. this time it may be running with the
tide - but again, the tide is temporarily drowned out into
insignificance.

so the end of the conundrum can be tsunami and tide now
moving together - rapidly rising real interest rates to stop
money leaving, but collapsing bond prices in step with this.

cash deposits and the dollar are strong, but all sectors that
rely upon borrowing, particularly the two thirds of money
creation related to mortgage lending, are weakened.

with the dollar strong, and a threatened global slump, the
oil price which is denominated in dollars, falls.

sea calm. tide out. mud flats reappear.

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