A Sign of Things to Come
All right, it seems to be getting a bit more serious on the debt ceiling as the Democrats and the Republicans are digging in. Obama and Speaker of the House John Boehner addressed the nation with different visions for our nation's fiscal future. The markets held up quite well yesterday despite the fear mongering among some that say we will see a total meltdown. Still at the very least we did get some kind of idea where money would go initially in the event of a downgrade or default. Record highs in gold and a record high on dollar/Swiss were just a few of the highlights that marked the first of what will be many “D” days to come. (D as in debt deadline days) Oil sold off as fears that a shock to the economic system world destroy demand yet rebounded a bit as the market realized that things may not be that bearish. In other words, while the first move in oil might be down, make no mistake about it that in the long run a debt default in the United States would be eventually bullish for oil. Very bullish indeed.
In fact we already had a kind of dry run for this crisis if you look back to the beginning of the global financial crisis. Back then the world thought that this subprime loan crisis was only a U.S. problem. That the rest of the world had “decoupled” from the United States and while their banks might fail the rest of the world was sufficiently protected from any U.S. fallout. In fact Jean Claude Trichet was so convinced that this crisis was a U.S. problem he raised rate in Europe while the U.S. Fed was lowering them. This caused a mad rush out of U.S. holdings and caused a massive sell-off in the dollar and a surge into commodities setting the stage for a run in oil to an all-time record high. We saw what commodities do with Fed action and an aversion to the dollar so we can be prepared if indeed the “unthinkable happens”. A downgrade to the U.S. debt rating would have less of an impact than a default but would cause havoc nonetheless.
The reasons are many but the main reason is it would almost guarantee a QE 3D. The Fed, acting to calm the markets, would flood the markets with freshly printed liquidity. That would counter rising interest rates with currency devaluation. We would see funds throw hot money at the emerging markets and demand for oil would surge despite the sharply rising price in dollar terms.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.