Higher Gas Prices & Lower Take Home Pay will Kill Rally

EconMatters's picture

By EconMatters  

Gas Prices Pegged to Risk On Trade


As long as gas prices are pegged to the market rally in equities and the currencies in the Risk On Trade then this rally is nearing its end. Gas prices are up 35 cents and climbing, oil is up $13 and climbing and because of congress consumers are being taxed more in 2013, and as a result have less take home pay to apply towards discretionary spending. That combination makes for a healthy economy? 


Decoupling Needed for Ultimate Recovery


Until gasoline and oil finally decouple from the Risk On Trade we are going to continually have this stop and start economy every time the market goes up on the correlated asset trade. At this pace I give the rally two more weeks at most, unless the aforementioned assets decouple. Gold and silver have decoupled, but oil is moving right up with the euro and yen funding currency crosses. 



Since When is a Higher Euro Good for a European Recovery


Not only is the Risk On trade going to kill the market rally in the US as consumers pull back as portrayed by the slide in consumer sentiment yesterday. But a stronger Euro is going to cause a very fragile Europe to contract more making their struggles even more pronounced with uncompetitive exports. This will cause the European market rally to falter, which in turn will cause a selloff in risk assets, and we are right back to where we started begging the central banks for more stimulus to support the markets once again.


The Unintended Consequences


Until markets get this correct, the economy is never going to recover. Essential commodities have to decouple from the risk on trade, especially when supplies are ample in the market. This just taxes consumers more, and they have to pull back discretionary spending to pay for higher fuel costs. Now once Europe and the US pull back, China`s end markets are weaker, and they pull back once again in their manufacturing based economy. 



The Fed Giveth & the Fed Taketh Away


This endless loop is so frustrating because it is easily remedied with some minor tweaks to markets which we have discussed elsewhere. On the policy front the Fed actually got it right with the concentration on mortgages, and QE3 initially didn`t cause oil and gas prices to spike. However, this buying of treasuries once again, just backfires in the long run because any economic gains in the stock market as a result of the extra treasury purchases juicing up stocks also juices up oil prices. Ergo, once oil prices are inflated, this also inflates gasoline prices as we have seen during this run in all Risk On Assets. 



The interconnectedness of markets between the Euro/Dollar cross and the Dollar/Yen cross, equities, oil & gasoline means that the Risk On Trade seals its own demise in the end by being contractionary in nature. 


It is similar to a cocaine addict in the end because the initial increased energy of higher stock prices is overtaken by the negative side effects of higher gas prices and a weakened overall condition after a longer duration of time.


The Einstein Definition of Insanity


So the benefits of higher stock prices are soon negated by higher gasoline prices, which hurts consumers, consumer sentiment, and the economy and this causes the market to sell off, and we are right back to where we started relying on more fed inspired QE programs to stimulate the economy once again. 


It is the dumbest and most self-defeating economic cycle in modern fed theory. The policy has been proven a failure by the very need to be continually “artificially propping up the economy”.


Further Reading - The Market Rally Tells Us Nothing About The Economy


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ceilidh_trail's picture

The markets rise over the last 4 years has been built on the backs of traditional savers. The Bernanke wants everyone in risk assets. I cannot believe that he doesn't realize that banks are not going to make loans that matter (ie real capitalism) at such low rates that don't leave any room for business risk. Until this guy goes, we will not recover.

Tall Tom's picture

A Relatively Strong Currency in a Weak Economy does not bode well. It stifles the ability to export Goods and Services to other Economies. This only serves to weaken the domestic Economy further. Political motivation will tend to have those in power create policies to weaken the currency in order to increase Foreign Sales as Domestic Sales are limited and lagging.


As for the EUR/USD ratio just what does that tell you about where it is heading?

akak's picture

Why, in your blinkered neo-mercantilist analysis, do you ignore the fact that a "strong" (less debasing) currency also LOWERS the price of imports, as well as benefits savers, investors and the long-term overall health of the economy in question?  Can any economy subsist ONLY on exports, all other considerations be damned?

Really, I thought Adam Smith put all this mercantilist nonsense to bed over 200 years ago.  Apparently not.

Joe moneybags's picture

"Until markets get this correct..."

The attitude that the market is wrong, and that an investor's opinion of where things ought to be is dangerous and usually costly.  Have not the past four years made this point in spades?

roadhazard's picture

I'm finally glad someone saw this besides me. I've been harping on this before I ever came here. There will be no recovery.

yellowsub's picture

You mean higher prices and lower pay is something that just happened a few months ago??

Rustysilver's picture

Paying $3.64 /gal for heating oil in CT. Everything is marvelous. Everyone is looking at the wrong things such as food and gasoline.

Winston of Oceania's picture

Was glad when NG came through town so I could get a vent free gas fireplace to suppliment. I remember when it was .69 a gallon.

MrPoopypants's picture

A decoupling has already happened - between the stock market and the real economy. Gas prices and middle class incomes pertain to the real economy, not equity markets.

Freddie's picture

Hope and Change.

ebworthen's picture

At the pump price went up over .50 cents per gallon in less than one week.


Must have been all that "recovery" talk.

Freddie's picture

Oba-MAO had them lower the prices so he could win the rigged 2012 election which was stolen in the cities in swing states and with Soro Scytl.  RINO Romney's job was to act suprised afetr he had used Scytl and ity vote rigging on Santorum.

j0nx's picture

Yup. Pretty much it in a nutshell. Sad isn't it.

Lordflin's picture

I was wondering what had happened to the recovery.

Tombstone's picture

No way will this rally die.  Computers do not pay taxes or buy gas.  Mom and
Pop investor is still on the sidelines waiting for the top before they come in.  And the welfare crowd don't care as long as the gov supplies them with food, drugs, wine and cigs.

williambanzai7's picture

I don't think these markets give a flying fuck about what it costs to tank up. or buy a bag of groceries.

We are beyond any semblance of fundamental rationality. Any indication to the contrary is purely accidental.

otto skorzeny's picture

I want to short this market so bad I can taste it-but I won't

tip e. canoe's picture

i respectfully disagree sir banz.   have a feeling they've been priming the pump for (a) the inaugeration and (b) to get people back into the housing & stock "markets".   let's see how long it lasts.   reversion to mean is always a bitch.   especially with the last GDP print & % of positive earnings "surprises" dropping like a rock.

interesting article