Money printing, oil, and the Simpsons

is it all just a "drop in the ocean"?

The money supply numbers came out today and they are continuing to ride high. Here’s the breakdown for the past 13 weeks.

As you can see from the numbers and the graph below, the money supply is running hotter than every previous year except 2020. This should set the stage for a Santa Rally. Though some (who are quite smart and experienced) are predicting otherwise. I highly recommend reading Lance’s article. He is superb and it’ll give you something to do after eating Thanksgiving dinner.

A close-up of the home stretch.

Money is flooding into the system. Markets are pushing up to all-time highs. Currently the S&P500 is within 1% of it’s all-time high which was recorded yesterday. We are continuing to see high real estate prices even as more inventory has begun to hit the market. Commodities are having one of their best runs in decades. The economy is red hot. Business is booming and many are searching for more employees. We are strongly in the boom phase of the business cycle.

The amount of money printing that is still going on is tremendous. We are beginning to see it seep into the psyche of the consumer. Today saw the release of the Markit PMI survey data. Commenting on the data, Chris Williamson, the Chief Business Economist said:

“The US economy continues to run hot. Despite a slower rate of expansion of business activity in November, growth remains above the survey’s long-run pre-pandemic average as companies continue to focus on boosting capacity to meet rising demand.”

“Input cost inflation spiked sharply higher in November to reach a new survey high, adding to pressure for firms to pass the recent surge in costs on to customers in order to protect margins. Although some resistance to higher prices was seen in the survey responses, serving to dampen demand growth to the slowest for nearly a year, average prices charged for goods and services continued to rise at an unprecedented rate.”

We are seeing businesses raise prices to keep profit margins intact. At this point, few consumers are balking at paying more. Though they are complaining loudly. One of the key inputs that is seeing the most attention is oil. Due to this, the Biden administration has decided to release 50 million barrels of oil from the Strategic Petroleum Reserve.

Those in the administration think that releasing this amount of oil will have an impact on the oil market. Their attempt at coordinating with other countries was a brilliant idea. However, their execution was poor. They are looking for a temporary reprieve from the high prices to score some political points. Those that actually understand economics and the oil market, know that this is an insignificant amount. That is why the price shot up today. It was better for the administration to say nothing and keep traders on edge, planning for a large release that would move the market. Instead, they opened their mouth and let everyone know how stupid they are.

There plan is to release 32 million barrels “over the next several months” and release 18 million barrels above and beyond what Congress had previously authorized. The whole press release can be found here.

Many have already come out with articles against the release. Hedge fund manager Kyle Bass has called for $100+ for a barrel of crude and $5+ for a gallon at the pump. He went on to call the release of 50 million barrels a “rounding error”.

Bloomberg oil strategist Julian Lee saw through the charade and come down hard with the facts:

“The OPEC+ group of oil producing countries will have to defer at least two months’ worth of planned output increases if it wants to offset the impact of coordinated crude releases from strategic stockpiles by the end of March.”

If OPEC just holds steady until March, this coordinated release will do absolutely nothing for the price of oil.

JP Morgan’s Marko Kolanovic had a much more dire prospect.

“focusing only on global stocks, bonds and commodities, oil is in the 19th historical percentile; in order to rise to the median (50th percentile) historical relative level, oil would need to be trading at ~$115/bbl (we say this is conservative because we have excluded “expensive assets” such as central bank balance sheets and Nasdaq, which would imply a median oil price in the $300-$500/bbl range)."

$300 oil would be catastrophic for the US economy. Kolanovic goes on to state how oil looks remarkably cheap right now. “One could say that oil producing countries (often developing countries) have been subsidizing oil importing countries (often developed countries), given the broad monetary and asset inflation in the developed world over the past 20 years."

Finally, Goldman Sachs weighed in on the decision. They stated that the release would be “a drop in the ocean”. They predict the price of oil will be $90 by year end and will remain higher for years to come.

The high price of oil is a symptom of the inflation disease. However, there are other factors that have come into play. By reducing the strategic reserve and increasing the costs for oil & gas companies, the Biden administration is on a collision course with higher gas prices for a long time.