1 Boring Old Man

Looking at the effect of the DOT.COM and HOUSING bubbles on the Stock Market raised a question for me. Why didn’t the bursting of the HOUSING bubble lead to a fall in the Market? Seems like it should’ve, to me [having become a bubble expert since I found out what a bubble was in September (Ha!)]. So I started looking for another bubble. It was easy to find, since it can’t be lost on any of us that the $4+/gallon gas prices have plummeted. So I Googled "Oil Bubble" and found a number of people before prices took a dive [Krugman included] that pooh-poohed the idea that Oil prices shooting up was a sign of a bubble. It was because of "fundamentals" not speculators, they said.

Oil bubble burst

I read an excellent analysis in ET today of the issues related to the oil bubble. The author, a Chief economist with a US think-tank, addresses each one of the arguments made as to why the oil price rise was related to fundamentals and not speculation. He shows the arguments are dead wrong (quotes from the article in italics):

• Oil prices rose because of a weak dollar: The price of oil has risen far more than the dollar has fallen. That means that oil prices have increased in other countries, which should have reduced, not increased, demand.
• Oil producers have held back production in anticiption of higher oil prices down the road: Nor have there been any report of unusual production cutbacks — the linchpin of the second argument. Indeed, the spike in oil prices actually gives independent producers an incentive to boost production.
• There can’t be speculation in oil because inventories have not risen: the storage argument fails to recognise different types of inventory. Thus, record-high speculative prices have likely caused bunker traders to release inventory, but those releases may have been purchased by speculators who are now active lessees of commercial storage capacity. The implication is that speculators can drive up prices and increase their inventory holdings even as total commercial inventories remain little changed.

The Bull Market since early Clinton days looks like it’s been a Speculator’s Market, bubble after bubble. The Market drove up prices on its own, without underlying substantive "fundamentals" to explain the rapidly escalating prices. This is a sign of a Market that is very dangerous, too unregulated, and ultimately a Market that has done widespread damage to untold numbers of people. All the economists are speculating why people refuse to recognize a bubble when it’s happening. It’s interesting that some of the people who are chiding others for not listening about the HOUSING bubble, are also people who were saying there was no OIL bubble. And now, about those record profits from the Oil Companies? And, by the way, this OIL bubble started when we invaded Iraq.