Oil Pulse (II)

Given two finite natural commodities, one a consumable energy resource undergoing accelerating absolute depletion, the other an indestructible precious metal, there can be no question about the fundamental trend of price divergence, surely? Except, apparently there can. Pure reason (or principled intuition) fails once again:


The world seems determined to thrash us into empiricism.


If there is a trend, it shows up more persuasively in the erratic sequence of consistently-escalating negative oil price shocks.

ADDED: Patri Friedman helpfully points to Hotelling’s Rule.

January 30, 2015admin 31 Comments »


31 Responses to this entry

  • Stirner (@heresiologist) Says:

    FOFOA has some cryptic goldbug insights into the grand scheme of things.

    For the perplexed, there is a lineage of goldbug bloggers that are constantly cited:

    “Another” – a supposed insider writing about the “deep gold market” nearly 15 years ago.

    “Friend of Another (FOA)” – an Another acolyte who keep the analysis rolling after Another went silent.

    “Friend of Friend of Another (FOFOA)” – the contemporary goldbug blogger, who weaves the analysis of Another and FOA into an up to date analysis of what is going on in the currency wars.

    Not to be believed 100%, but definitely an insightful angle on things. FOFOA’s blog post on Moneyness is gets at many of Moldbugs points about currency and savings from a different angle.

    FOFOA is in the hyperinflationary camp, and makes a plausible argument that the special interests and the 1% will allow the hyperinflation to occur, because they are directly suckling on the teat of the printed easy money. In a hyperinflation, they get to use the inflated dollars first, maintaining their relative position towards the masses (who get to use the depreciated dollars later). They don’t have to outrun the bear, they just have to outrun the slowest runner…


    Kgaard Reply:

    No, no, no, no and no. The 1% does not want a hyperinflation. If you’re already rich, your top priority is keeping what you have, which means bonds. If you hold bonds, the last thing you want is inflation, let alone hyperinflation. If anything, it’s the rich who have been responsible for the erroneously too-tight path of monetary policy in Europe (now in the process of hopefully getting fixed).


    Steve Johnson Reply:

    “The 1% does not want a hyperinflation.”

    That’s absurd.

    Leaving aside the assertion that the 1% owns bonds and therefore would be on the losing end of inflation (as opposed to the 1% owning part of the government and getting enriched through money printing) – just because you want something doesn’t mean you get t.

    Fat people want to be thin. They also want to eat cupcakes. Guess what happens when they do.

    Paid propaganda takes on a life of its own – pay people to say that printing money (and giving it to you) is a great idea and you may be cynical but when those people teach your children and their children then your grandkids aren’t going to know any better.


    Kgaard Reply:

    Europe’s bond yields fall to lowest since the Black Death:


    If hyperinflation is right around the corner, why are bond yields the lowest in 700 years?

    A good example of thrashing one into empiricism.

    Bryce Laliberte Reply:


    Bottoming out like this is an indicator of imminent hyperinflation.

    It doesn’t guarantee it, but such erratic market movements mean anything other than stability.

    Kgaard Reply:

    Time for some bets then!!

    Stirner, Steve and Bryce, what are your forecasts for CPI, oil or gold one or two years hence?

    Surely you all are looking for 8% CPI and $100 oil?

    Let’s get it down on paper.

    Or propose an over/under and perhaps I’ll take the other side.

    Aeroguy Reply:

    The 1% what about the .01%. They have diverse holdings including the actual capital assets that are immune to inflation. Hyperinflation happens, they’re still able to secure protection from any angry mobs and go on a buying spree when everyone else has to sell their house to buy bread. The guys depending on their 401k (people who work for a living) are the ones who get screwed the hardest in hyperinflation.

    Differentiating the rich and the Washington rich is becoming a very important distinction (perhaps a scale is needed to measure the distance between rich guys and money printing / government contracts), perverse incentives and all that. The bond bubble is how the guys have been getting fed the printed dollars, bonds can’t be used as a indicator.

    When a weakened petrodollar intersects the sovereign debt crisis, overtime money printing enters M1 to pay for socialism (as opposed to sitting harmlessly in banks) while the pile of money overseas returns home when countries start buying oil in their native currencies. There is still some way to go on both those things but the trajectory is fixed.

    As for the present situation, I’m sticking with 1-2 years for low prices but 100 is still too high 2 years out. 6 month rolling average above 85 2.5 years out would be a better bet.


    Andrew E. Reply:

    FOFOA takes extreme care to differentiate his views (and those of Another and FOA) from those of goldbugs. FOFOA would call himself a physical gold advocate (PGA) which is not the same thing as goldbug. Goldbugs want and expect a return to the classical gold standard whereas FOFOA just expects the price of physical gold to be set free from the paper markets where it will then be used solely as store of value.


    Posted on January 30th, 2015 at 2:05 pm Reply | Quote
  • Kgaard Says:

    I love the gold/oil chart. It’s actually more instructive if you run it back to the 1940s, but either way it’s clear that oil is now equal to its weakest point relative to gold in the entire post-WWII era.

    What’s interesting to me is that oil has spiked down to this range (25 barrels/oz. or thereabouts) about a half-dozen times since WWII. This level has always marked the bottom for oil. What will happen this time? In my mind there is no guarantee the bottom holds (i.e. $40-45/bbl holds) but I don’t know.

    There are many other commodities whose real value has just gone down and down and down over the past 100 years due to technological advance. The grains top the list. Could that happen to oil? Are we in a new realm of, say, 25-30 bbls per gold oz., whereas it used to be 12-17 barrels with occasional spikes to 25? I don’t know yet but I’m open to the idea. Technological innovation undermined many other commodities, why not oil?


    Posted on January 30th, 2015 at 3:06 pm Reply | Quote
  • Oil Pulse (II) | Reaction Times Says:

    […] Source: Outside In […]

    Posted on January 30th, 2015 at 6:41 pm Reply | Quote
  • Vypuero Says:

    The deflation happens first because the money printing is designed to pump up asset prices so bank balance sheets stay solvent. This creates the serial bubbles. Right now, we will be able to watch a currency die – the Swiss Franc. It is now very high (deflation) but as yields drop under 0 (they are under 0 for every bond but the long bond) there will be a currency collapse and a form of hyper-inflation. It is explained well here:

    FOFOA posits something similar but again first there will be a rise in the currency value. See his latest posts.


    Posted on January 30th, 2015 at 6:50 pm Reply | Quote
  • Vypuero Says:

    looks like in the comments they hate the guy, but that’s why I don’t read ZH comments any longer too many wackos – I thought his ideas made sense – so let’s see what happens. The dollar is different its fall will have to do with its failing to be the reserve currency – when everyone finally says they don’t want it any longer. Could happen soon or still be years away, but it will happen.


    Kgaard Reply:

    Forecasts … we need forecasts. What is your specific forecast for CPI for a specific year? I’ve yet to see one person forecast anything. It’s all getting very r-selected …


    Aeroguy Reply:

    CPI is as bogus as the unemployment rate. Student debt and medical don’t factor into that? The number has more to do with how they want to measure it than any sort of reflection on reality.


    Hurlock Reply:

    Don’t try to explain to Kgaard that he is full of shit, it doesn’t work.

    Posted on January 30th, 2015 at 6:54 pm Reply | Quote
  • VXXC Says:

    Could it be what we think of as markets don’t exist? And need 18th century bureaucracies [nil] to function?

    Uh Oh.


    an inanimate aluminum tube Reply:

    “Could it be what we think of as markets don’t exist?”

    A question that NRX really needs to investigate


    Posted on January 30th, 2015 at 7:38 pm Reply | Quote
  • VXXC Says:

    I’m fascinated they have charts going back to before the Black Death.


    Posted on January 30th, 2015 at 7:40 pm Reply | Quote
  • Matt Says:

    We’re looking at a deflationary death spiral that will destroy the economy unless there’s some reasonable demand management.


    jay Reply:

    The myth of the deflationary spiral:




    Matt Reply:

    Collapse in price results in collapse in spending and income, which triggers further collapse in spending and income. The collapse in spending and income results in collapse of asset prices which triggers still further collapse in spending and income. The collapse in spending and income results in debt being unable to be serviced and triggers debt deflation as spending is cut and there are sell offs to try to service the debt which of course results in yet more collapse in price and spending and income.


    Hurlock Reply:

    The issue is that the current deflation is a natural effect of previous inflation by monetary expansion.
    Which is why your whole point is totally wrong, especially when applied to the economy nowadays.The deflation is a naturall readjustment process after the boom and inflation caused by printing money. If the central bank stops printing money, deflation ensues. If it continues printing money it doesn’t. The issue is that the more money you print and feed into the economy the more you need to print to keep it afloat. This initiates a positive feedback loop which eventually leads to hyperinflation and afterwards an even a worse case of deflation.

    Eventually you will have to go through the deflationary readjustment. The question is do you want it to happen sooner or later. Optimally you want it to happen sooner rather than later, because the sooner you go through it, the less painful the readjustment will be. But in a democracy, nobody wants to be ‘that government’ which ‘allowed a depression to happen’. So everyone kicks the can down the road.

    Matt Reply:

    My point regarding deflation is correct, with or without money printing.

    The notion that we have to go through a deflationary death spiral “eventually” is of course nonsense. “Eventually”, we’re all dead. So why not everybody undergo “readjustment” and off themselves now?

    Posted on January 30th, 2015 at 8:20 pm Reply | Quote
  • Patri Friedman Says:

    Your thesis here is ignorant of the basic economics of non-renewable natural resources. I understand NRX is generally interested in the flaws in such models, but you should still start with an understanding of them; in order to show where they may not apply.

    Specifically, Hotelling’s rule states that the price of such resources should rise at the interest rate. Any other price path fails to maximize profits for the resource owner, and incents the owner to extract more or less of the resource in order to achieve higher profits; which action corrects the price path towards following the interest rate. That path is the only equilibrium.

    Of course, unexpected supply shocks & changes, demand shocks & changes, development of other technologies, and other events will make the price move erratically. The theory doesn’t predict the path will be perfect. However, from first principles, we should expect the price ratio of every pair of natural resources to stay roughly constant; as both should rise at roughly the interest rate.

    See wikipedia: http://en.wikipedia.org/wiki/Hotelling%27s_rule


    admin Reply:

    Thanks — very interesting, I’ll follow that up. Can’t understand why I’ve never seen it thrown at the Peakers.

    The link you provide doesn’t seem very convinced by the empirical reliability of Hotelling’s Rule: “[Which] is not in line with the statistics observed over more than a century. Statistics concerning U.S. price data for the period 1870–2004 for copper, lead, zinc, coal, and petroleum, 1880–2004 for tin, 1900–2004 for aluminium and nickel and 1920-2004 for natural gas, reveal the rate of change of prices of these resources being influenced by a high degree of volatility. But the more important phenomenon is that the volatility seemed to be centered at 0. In fact the mean rate of change of price in none of the ten cases is considerably different from 0. Thus the actual price of the resources does not seem to be following a particular trend and definitely not the path of the positive trend as recommended by Hotelling’s rule.”


    Posted on January 31st, 2015 at 9:17 pm Reply | Quote
  • Hurlock Says:


    “The notion that we have to go through a deflationary death spiral “eventually” is of course nonsense. “Eventually”, we’re all dead. So why not everybody undergo “readjustment” and off themselves now?”

    This is why we can’t have nice things.
    (Like a lower time preference)

    I keep forgetting that trying to talk some sense into imbeciles like your is an utterly futile endeavour. There is no cure to the ‘in the long-term we are all dead’ type of thinking.


    Matt Reply:

    Wanting to collapse the economy for some fetish for “readjustment” or to scoop up some cheap stuff at collapsing prices is high time preference.

    If you want investment in the future, you need a functioning stable economy, not an economy collapsing into a deflationary death spiral.


    Hurlock Reply:

    It’s the initial inflation and boom which is the real collapse, the readjustment via deflation is how the economy fixes itself.


    Aeroguy Reply:

    There is a difference between a death spiral and and the cleansing fire of economic adjustment. The idea the central bankers can deliver us unto goldilocks is a sham. They have done nothing of the sort and history proves it. Did you even read the part jay posted? If deflation is about people not buying crap they don’t need, they don’t bury the money, it goes into capital investment. Money and the associated production doesn’t disappear, it gets redirected. Sure it can collapse the plastic crap market, good riddance.


    Matt Reply:

    Capital investment like any other spending declines in a deflationary death spiral.

    Central bankers can’t really resolve cascading deflation. They can only prop up asset prices which makes the wealthy happy as their portfolios rise while the rest of the economy deflates and contracts.

    Deflationary death spirals require demand management. Fiscal policy. Monetary policy is ineffectual.


    Posted on February 1st, 2015 at 2:02 am Reply | Quote
  • NRx_N00B Says:

    Dead cat bounce or what?!


    Posted on February 3rd, 2015 at 11:09 pm Reply | Quote

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