Is the Federal Reserve using High Oil Prices to Hide Inflation?This may be a bit of a controversial post, but if you choose not to go down the rabbit hole, you can at least check out my two technical ideas.
Oil is a trade we have been long since the break above $44.00. Our target was the major resistance/flip zone around $66.00 which we hit to the T:
Once price hits our major flip zone, we should expect a possibility of a reversal of the trend. Oil actually is beginning to develop our favorite reversal pattern: The Head and Shoulders pattern.
As you can see from the main chart of this post, $62.00 is where the right shoulder began forming. The trigger remains the breakdown. Meaning we need a daily BREAK and CLOSE below the neckline of the $57.00 zone. This would set us up for a new downtrend, with a move to $51.50. and even lower back below $50.
Alternatively, here is a 4 hour chart set up:
The $61.90-$62.00 zone remains key. We get a break and close above, and then we continue a move higher to $66.00, and if this breaks...Oil is moving much much higher. We should then be talking about $100 a barrel.
Our job is now to be patient and await for out trigger. On the 4 hour, you can see price ranging and coiling. The daily chart trumps the 4 hour, so I think the rabbit hole is what we need to look at for the trend and market structure to be manipulated.
Before I posted this idea, I have been thinking about this. Everyone is wondering where the inflation is from all the money printing.
First of all, I want to cover inflation from a classical standpoint. Inflation is when the fiat currency is weakening, where it now takes more of a weaker currency to buy something, hence price increases.
Recently, I have read German Economists Richard Werner's work titled "Princes of the Yen". Highly recommended for anyone wanting to understand central bank monetary policy, and economic history in general. His definition goes like this:
As long as new money/credit goes to productive investment, real wages will rise and there will be no inflation. How? If money goes to productive things, more goods and services will be created, which means the economy will be improving, which means the demand for money will increase which then warrants the money that has been created/printed.
The second case if more worrying...If new money/credit flows to UNPRODUCTIVE means, ie: investment in stock markets and real estate... a situation we have been seeing since 2008, there is danger for inflation because now there is more money chasing the same number of goods and services because of no increase in productivity.
In the past, I have spoken about why universal basic income will need to be matched with some sort of taxes. If you just give people more money, there is now a situation with more money competing for the same amount of goods and services. The way government can control this will be through taxation...the green kind. Where perhaps rather than $1000 bucks in UBI, 50-60% will be taxed for green taxes, which the government will then use for green infrastructure projects which hopefully will be productive.
So our situation currently focuses on number 2. Again, I have warned my followers about this. Stock Markets and other assets will continue moving higher even with the real economy dying because it is all about chasing yield. All central banks are attempting to weaken/kill their currencies in order to boost exports and keep asset prices higher. We have the worst of both worlds here.
Most of us have seen the prices of goods increase. The Federal Reserve and other Central banks say this is not the case according to their inflation measures. The Consumer Price Index, or the CPI, is the most famous way to measure inflation. It is a basket of goods and services that represents what the typical consumer purchases regularly.
Energy prices play a large part in this because many people fill up their vehicles to drive.
A key thing to remember is that the Fed has said that they will normalize their balance sheet, and increase interest rates when 2% inflation is steady and NOT 'transitory'. Here is where we go down the rabbit hole. Most of us know that interest rates cannot go higher. Too much debt out there now. Generally, when inflation is moving higher, central banks would increase interest rates. Oil prices moving higher can kill two birds with one stone.
If Oil moves higher, the Fed can mask inflation due to excess money by blaming Oil. Oil prices moving higher means transportation costs increase as well so it will affect food prices and other prices. CPI data will begin to reflect rising prices, but the Fed will blame Oil for this. Also, the Fed can say this inflation is 'transitory' hence why no rate hikes will follow, which means the Fed maintains confidence and saves face.
Let's go down the rabbit hole even further. But before I say this, I must say that I have seen 'events' like this occur many times when commodities are at major flip zones. We should expect some sort of event to cause Oil to spike.
Laugh all you will, but before I typed this post out, I have been saying this for a week or more to my private circle. What happened? The Houthi's began attacking Saudi Oil facilities with drones, the suez canal got blocked by a cargo ship, and an Indonesian oil refinery exploded because it got hit by lightning.
The Fed can then use this event as a way to mask inflation. "Oh inflation has spiked not due to our monetary policy, but because of Oil. But don't worry, we won't hike interest rates because this inflation is transitory. Money printing will continue". I think this is important because financial media is talking about rate hikes in the future...but most of us know this can never happen. We are likely to go into negative rates.
