Oil, Bonds, Economy

Discussion in 'Energy Futures' started by naz9403, Jun 23, 2005.

  1. naz9403


    I admit i don't fully understand bonds well.

    Could some of our smart traders out there explain the relationship now with high oil related to bonds and the economy.

    Thanks guys
  2. cakulev


    It’s conflicting.
    On one hand you have higher oil pushing inflation -> bond yields up
    On the other hand you have higher oil pushing economy in recession -> bond yield down
    Good luck figuring out which sentiment is dominant.
  3. naz9403


    Yes i have absolutley no idea, keep the posts rolling guys.

    Just bought "secrets of the temple-how the fed reserve runs the country"
  4. OK, try this logic out------Increasing energy prices are indicative of a healthy economy because users can afford to pay progressively higher energy prices while their earnings are increasing faster than the oil price which then means they can buy bonds with their surplus and further drive down longer-yerm interest rates.
  5. In the early 80's Fed Chairman Volcker raised short-term rates to near 20% in order to kill inflation caused by the oil-shock of the late 70's. This crushed economic growth until the Reagan tax cuts took effect. If oil were to spike up to $80 or higher in a short period of time, the question is: would Greenspan act the same today as Volcker did back then? I believe there is a distinct possibility that if the fed funds rate were to be sharply increased, longer term bond rates would continue to stay low because of the fed's committment to combat inflation. A few other considerations: oil is not as expensive today as it was in the 70's on an inflation adjusted basis. Additionally, cheap labor from China and India are keeping broad-based inflation measures low, and making it less likely that oil will cause a broad-based increase in inflation.
  6. it's like a wrestling match. and you get to change your bets depending on who's looking stronger.

    if pickens is right and we see 3$ gas, I'd say oil wins -- that is, high oil will do the job of interest rates and the economy will hit a wall.
  7. the hummer h2 has a 32 gallon fuel capacity... gas at $3/gal would be nearly $100 per fillup (probably every week OR MORE since they do about 150/mile per fillup realistically)... or $400 out of discretionary income a month... i think people would flipout if they got a $400 phone bill every month but would they be willing to pay $400 for gas? what if the trend called for even higher gas... hmm
  8. i agree. people notice it at the pump -- it's effective behavior modification (to put it nicely).
  9. You really need to look at the margin. If oil at $3/gallon means it costs $400/month to run your Hummer, the discretionary income loss is $400 minus what it would cost w/oil at, say, $1.80/gallon. In other words, not nearly $400 month.

    Thus far, there is zero evidence that high oil prices are slowing the economy. The comparison to the 70s doesn't work, IMO. Between Nixon and Carter, we had the worst economic policy in the history of the country during that decade. First wage and price controls under Nixon and then windfall profits tax under Carter. Both served to create artifical shortages, which drove inflationary pressures even higher and made my parents have to wait in line to buy gas.

    If those morons had just let the markets clear, there would have been no gas lines and no hit to economic growth. Yes, prices would have been high for awhile, but so what. Like the price of every other commodity that's ever been produced, they would have come down.