davidstockmanscontracorner.com / by Jeffrey P. Snider • July 27, 2016
On February 6, 2008, oil prices (WTI) dropped to $87.16, the lowest price since the prior October. Oil had been rising as the market misunderstood and dramatically mispriced what was going on; buying on the idea of monetary policy accommodation in growing intensity, while at the same time not factoring the hidden monetary destruction that was far greater. It was in many ways an extension of then-Fed Chair Ben Bernanke’s March 2007 Congressional testimony that, “problems in the subprime market seems likely to be contained.” Whatever was happening in global finance, the illiquidity was expected both to stick to MBS and mortgages exclusively while being overcome by the “Greenspan put” of greater monetary effort under Bernanke.
From early February on, despite all the unfolding disaster leading up to Bear Stearns that March, oil prices were financially insulated by those misconceptions. There was only a brief pause in the surge just after Bear, as WTI fell from about $110 to $100 only to take off again once it appeared (as was repeatedly claimed and emphasized) that monetary policy was working. It wouldn’t screech to a halt until oil hit $145 per barrel the day before the July 4th holiday.
There was some volatility in the days following, but on July 14, 2008, WTI was right back at $145. In between, Indymac had failed and, more troubling, the giant GSE’s had come under severe funding strain, with their stock prices tanking dramatically. As a result, the SEC announced on July 15 that it would effective July 22 ban naked short selling of not just the GSE’s but also primary dealer banks. It was, effectively, an announcement that dollar funding was really much more than Fed talk, and that all the optimism about the dollar in response to monetary policy was dangerously misplaced.
The post What Oil Price Recovery——-It’s August Again, Stupid! appeared first on Silver For The People.