"I Don't Know Why I Should Take The World Seriously If The World's No Longer A Serious Place"

[hatrack]

Each week I look at the economic and energy data. While there are indeed some actual green shoots in the monthly reports, I can not escape the feeling that our society is like Disneyland, a magic kingdom where life is a fairy tale and dreams really do come true. I call it Disneyland because the crazy rise in the S&P 500 and the oil price in recent months has happened despite, not because of, fundamentals in the economy. The disconnect between the markets and the economy is almost total. The markets reside in a fantasy realm, while most of us must deal with depressing day-to-day realities. There will eventually be a downward “correction” in the markets, but only because there’s no avoiding the fact that reality always gets the last word.

These market price movements do not happen by accident, of course. The “logic” behind these market rallies is best explained by movements in the value of the Almighty Dollar. Amy Jaffe and Kenneth Medlock of Rice University’s Baker Institute further confirmed that view this week with the release of their study Who Is In the Oil Futures Market and How Has It Changed? This view of America as a Magic Kingdom will never be popular. People vested in a crazy system—consider the wacky idea that an economy can thrive based on trading in residential real estate while household debt grows and real income languishes—will remain vested in that system long after it has ceased to function.

I don’t know why I should take the world seriously if the world is no longer a serious place. Altruism is dead. Morality is considered quaint. Many of us are left with a survival problem—that is the only truly serious business at hand. We’ve been abandoned in the economic wilderness, left to fend for ourselves. Speaking of life, no one ever told me “you’ll need to be a currency trader if you want to survive the worst of it.”

EDIT

I am not going to go through the Medlock and Jaffe paper in tedious detail. I just want to make the obvious points that need to be made, so read the original paper if you want to know more about how the Commodity Futures Modernization Act “effectively cleared the way for more lax regulation of new oil risk management products, including index funds and price swaps, setting the state for a rapid increase in financial players’ participation in over-the-counter (OTC) markets.” The oil market has been financialized in the sense that it serves as a means for investors to hedge against a rising or (mostly) falling dollar. What can one say about this? I believe Judy Dugan, research director at Consumer Watchdog, put it best— "Using an essential commodity as is crazy. If you want a double dip recession, let’s just get $100 oil again.” Of course it’s crazy. Investing in stocks to hedge against a deteriorating dollar is one thing, but jacking up the price of gasoline for everyone so a relatively few non-commercial players can cover their ass is quite another. Welcome to Disneyland.

EDIT

http://www.energybulletin.net/node/50027