Monday, June 16, 2008

The Paulie & Benny Show - Fight Oil With Strong Dollar?

How many people actually make critical decisions in Washington? Definitely not Bush. Why aren't there more pressure on the CFTC to clamp down on the position limits issue? If you read between the lines, Paulson does not think speculators are to be blamed for the spike in oil price. Bernanke has been unusually quiet on the matter. Bush has been quiet because nobody has told him what to say on that matter.

Its significant that Paulson holds that view because that will point towards the mediation prescribed by Paulson and Bernanke. If it was me, you all know what I would have prescribed already.

Hence, the Paulie & Benny Show is prescribing the stronger dollar as the medication for curb oil prices.The US dollar just cnotched the biggest weekly gain against the Euro since 2005 and the biggest weekly rise against the Japanese yen since December 2004. Bernanke’s speech on Tuesday prompted the strong turnaround in USD sentiment; he said that US economic risks have diminished and he’s paying attention to the weak dollar. Increasingly over the past few months, a weaker dollar seems to be negatively correlated with oil prices although whether a causal relationship exists between these two is another issue altogether.

What we do know is that Paulie & Benny would not do things halfway. If they are prescribing a stronger USD to counter oil price, then believe you me that it will be a sustained and prolonged strategy for more than a few weeks.

I hope its successful. If not, I hope Paulson would kindly remember how Nelson Hunt tried to corner the silver markets in the past by hoarding futures. Hence speculators can be akin to hoarders, especially when they act as a group, and when this group is overwhelmingly stronger than other genuine players. Paulson may think that asking CFTC to change rules is tantamount to market intervention, well, remember that the LME had to step in and changed the rules to bust the silver cornering attempt by Nelson Bunker Hunt.

To me, thats where oil price is headed, for its Alamo. Hence it is infinitely better for all to "tweak the rules" at US$130 than to tweak it at US$180. Surely if oil were to go to US$180 this year that Paulson would maybe admit that speculators are responsible. I do think Paulson is still beholden to the big investment firms in New York rather than do the right thing for the markets. I do think that Paulson may be buying time for the big investment banks to neutralise their positions before asking CFTC to act to lower position limits.

Choice A or B, Paulie & Benny are acting to strike down oil price. The more successful they are, the better it is for equities.

photo: Carmen Soo

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