Fed punishes the commodities speculators
Although this post sounds like we're talking about lofty oil prices, it's really a corollary to understanding how the consumer ("Main Street") views intangible rallies - how can the price of oil double in one year is a similar question to how can home prices double in five years. In an economic vacuum, it defies logic.
Following up on Tuesday's Fed rate cut of 75 points... the lower than expected rate cut served as a "warning to commodity speculators" and today gold and oil continue their plunge as funds unwind their positions. Main Street doesn't realize how powerful market speculation plays on seemingly tangible commodities like oil. They believe oil prices should follow the logic of supply and demand, and can't really fathom why oil prices have essentially doubled since last year.
The logical part is the media and economists point to increasing oil demand from China and Asia as their economies grows and to the weakening dollar as the base currency for oil pricing. The unfathomable part is traders take positions on the momentum of these data that spike prices far more than expectations. Then when a simple event like an unexpected 75 point Fed rate cut occurs (everybody was expecting 100 points), suddenly the dollar strengthens and traders sell off and tank gold, oil and even food. Opinion is divided as usual, some traders believe the long term economic fundamentals for higher oil prices aren't magically disappearing and CNBC and other media suggest the commodities rally is over.
The moral of the story - pricing is relative (or simply subject to manipulation). It's the basis of the argument why housing prices in some areas like San Francisco simply may not fall back down to 1999 levels, despite the logic (poorer economy, national housing slide) that it eventually should do so. (1999 prices are apparently happening in today's Stockton 60 miles east of SF). It's the traders (or buyers/sellers) who dictate the markets.
Pat:
A timely article!
The inverse relationship between oil and real estate prices in far-outlying suburban communities (such as Stockton or Temecula)is interesting and almost predictable.
And don't you know many commodities traders were slapping their heads after the surprise Fed cut....
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The performance of the market is scary. Eventually, city pension funds will realize the market is crazy and decide to invest in themselves. Nestle is buying up the water supplies of the various municipalities while those same local governments are buying Nestle stock! Hopefully, pension funds will realize that the market is untrustworthy and begin to procure their own resources for themselves, as investments and also as a safeguard on their own resources. Our municipalities really should own their own resources. Hopefully, stock market ups and downs will help them realize this.
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