Day in and day out we here pundits defend the price of oil being a function of supply and demand. We are told that speculation has little, if anything, to do with oil. However, when one looks at the price appreciation of other in-demand commodities, oil prices are far more inflated.
Let's look at the long end of the treasury curve. Tell me there isn't some speculating going on there. The long bond sells off due to a modestly positive (not that positive when one looks at the table and comments by Wal-Mart) advance retail sales report. Then it sells off, ostensibly because two Fed Presidents (Fisher of Dallas and Hoenig of KC) express inflation concerns. Gee, there was no unwinding of bets for a potentially poor Advance Retail Sales report and positioning for a potentially bad CPI report. CPI comes in tamer-than-expected, but only because of a change to the seasonal adjustment of energy and the inability of companies to pass prices increases on to consumers.
Finally, to all those "experts" who criticized Bernanke for engineering the Bear bailout. If he did not engineer the deal with JPM, there would have been a systemic failure. Lehman could have been the next failure and the entire street would have been negatively affected as one firm after another would have been unable to fulfill obligations to their counterparties. Anyone who has been involved in the Repo market knows what can happen when one firm fails to deliver. The entire street can fail to deliver the bond in question.
The futures market is now pricing in a 50% chance that begins tightening in October. Although that may be too soon. Look for the Fed to officially pause in June. Look for oil below $100 and the 30-year government bond over 4.75% by year-end.
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