Default to Oil
The Boehner bill goes down in flames and gives the tea party a win. Demands for real spending cuts as opposed to some political whitewash that just makes us feel better for a while has been defeated so now maybe there will actually be some real change we can believe. Default looks like a real option and some are starting to wonder if indeed this will be the end of the world or perhaps it's the medicine that our country needs to attain real long term fiscal responsibility. The type of change that may create an economy that will not saddle our children and our children’s children with debt that will harm the dynamism of the US economy for years to come. Debt that will deny businesses to prosper and keep more American workers poor and in poverty with a system that is too bogged down with debt. Maybe this is the time to change Washington for good. Maybe this is time to fix the ridiculous excess in Washington and fix our tax code and Social Security and health care for real.
As I have already explained a default would be a shock to the system and could create some incredible ripple effects. Yet the predictions that a default or a downgrade would drive us into recession are probably false. In fact it a weird way it may actually stimulate the economy. It is possible that a sharp rise in interest rates may spur some economic activity by money that has been on the sidelines wanting to lock in what may be a low in rates. We would see a round of QE3D that would cause a surge in commodities and would make stocks look more attractive. Banks would have more incentive to lend as higher rates would increase their potential returns in lending money. Retirees might have to depend on the government less as higher returns of low risk investment like money markets and such would improve their standard of living.
Maybe we should not be all doom and gloom but look at this as an opportunity to restructure the US economy so it can compete in the new global economy. A leaner United States could transform the globe and allow US business to flourish. A downgrade, while unpleasant, may not be the worst thing in the long run if it forces Washington to face up to reality and fix the tax code and restructure and privatize entitlements to ensure their long term viability and not bankrupt the government.
For commodities it is a win-win. As I said before, 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. Oil could sell off initially as fear that a shock to the economic system world destroy demand yet then rebounded a bit as the market realizes 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 US would be eventually bullish for oil. Very bullish!
Worries about a Spanish debt are actually giving the dollar support despite the gridlock in Washington.
Tropical storm Don looks like it is headed to Corpus Christie and oil companies are taking needed precautions. The market seems unconcerned at this point as they hope the storm won’t be strong enough to do any real damage. Still beware as even a storm the size of Don can do some damage. It may not but when the market underplays these worries that is when you can get a surprise to the upside.
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.