2012 February 16 | timiacono.com

A Startling Disparity in Gasoline Prices

There’s more talk about $4 or $5 a gallon gasoline this spring, right around the time that we take another 6,000+ mile trip to the East Coast, and, with some of the lowest prices in the nation here in Montana, I wish there was a way to strap on a couple of 75 gallon tanks to the car for reasons that should be clear from GasBuddy’s Gas Price Heat Map below.

Signs indicating $2.99 per gallon or below are a common sight around here.

Amazingly, crude oil was recently selling for just $70 a barrel at the Clearbrook, Minnesota distribution point due to the growing production of Bakken shale oil in this part of the country combined with few alternatives for transporting the stuff to other states. The much talked about Brent-to-WTI spread has recently moved back toward $20 a barrel, but the Brent-to-Clearbrook spread now sits at almost $50!

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When Models Trump Common Sense

More evidence that U.S. economists are particularly ill-suited to run the U.S. economy comes via the fascinating exchange in recent days between St. Louis Federal Reserve President James Bullard and a small army of bloggers with PhDs in economics, nearly all of the latter ganging up on Bullard after he suggested that the “output gap” theory for what ails the U.S. economy may be fundamentally flawed and that attempts to boost overall demand to close that gap through freakishly low interest rates and other super accommodative Federal Reserve policies might end up doing more harm than good.

Bullard threw a cat amongst the pigeons in this speech(.pdf) when he noted the following:

The recent recession has given rise to the idea that there is a very large “output gap” in the U.S. The story is that this large output gap is “keeping inflation at bay” and is fodder for keeping nominal interest rates near zero into an indefinite future. If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates. This could be a looming disaster for the United States. I want to now turn to argue that the large output gap view may be conceptually inappropriate in the current situation. We may do better to replace it with the notion of a permanent, one-time shock to wealth.

Recall that I’ve railed on this subject a number of occasions over the years, the last time being this offering from about six months ago when it was noted:

The theory posits that it is not important what level of overall demand an economy has reached or how it got there, but that, when all the wheels fall off the wagon as they did back in 2008, the imperative is for the government to somehow restore that level of demand. Otherwise, you get another Great Depression.

It makes no difference if, back in 2005, people making $40,000 a year were buying no money down $500,000 homes and then, after the home’s value went up to $600,000 in 2006, pulling out their $100,000 in brand new home equity to put in a pool, buy a motor home, and install big screen TVs in every room of the house because, once you reach a certain level of demand and it begins to drop like a rock because everyone has become indebted up to their eyeballs, it must be restored.

At that point, it simply becomes a question of how much taxes must be cut or how much money must be borrowed or printed to accomplish that goal.

Of course, I don’t have any models to back up the contention that an unusually large portion of economic output we saw in the middle of the last decade was “artificial” due to the housing bubble, but economists do have models, and that’s the crux of the problem.

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How Gold Demand Has Changed

Chinese gold demand that, this year, is expected to overtake long-time leader India appears to be the biggest story generated from the World Gold Council’s latest Gold Demand Trends report, but, the graphic below derived from Table 10 also tells a compelling story about how gold demand has changed over the last decade.

Per the footnotes, the data above does not include central bank sales and purchases that shifted from the former to the latter in 2009 and would make an even more impressive graphic. From net sellers of 400+ tonnes early in the decade, central banks are believed to have purchased about 450 tonnes last year, primarily in emerging market economies where officials have grown increasingly wary of all the money being printed in the West.

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Thursday Morning Links

MUST READS
Europe Demands More Greek Budget Controls – Bloomberg
Contagion fears back on Greek bailout uncertainty – Globe & Mail
Negotiators reach deal on $150B economic package – Washington Post
Moody’s places more than 100 banks on review – MarketWatch
Italian Bonds Drop After Spain’s Borrowing Costs Climb – Bloomberg
Growth Slow, but Fed Says More Easing Is Not Likely – NY Times
Fed officials open to stimulus action, minutes show – Washington Post
Gold Demand Hits New Record Highs as Europeans Stockpile – CNBC
MFGlobal Reveals You Are A Bank Counter-Party – The Big Picture
Counterfeiting and American Monetary History – Uneasy Money
The Grand Failure of the Econometric Model – of two minds
Bad Week for Freedom – The Burning Platform

MARKETS/INVESTING
Oil Hovers Below $102 as Iran Tensions Bubble – AP
Gold retreats as worries over Greece hurt euro – Reuters
One Apple Analyst Says ‘Sell’ as Stock Keeps Climbing – Bloomberg
What Does Declining Gasoline Consumption Mean?/ – The Big Picture
Risks to Global Oil Supply Rival Late 1970s: Report – CNBC
PIMCO, Texas Teacher Retirement System, Soros Buy GLD; Paulson Sells – GoldCore
India gold imports down 42% in Q4 2011, top importer of the year – Commodity Online
China to Surpass India as Biggest Gold Market This Year, Council Predicts – Bloomberg
Gold miners’ results move in opposite directions – Globe & Mail
Is Gold Really An Inflation Hedge? – Capital Spectator

ECONOMY/WORLD/HOUSING/BANKING
Our prolonged employment gap – MarketWatch
Consumers not fooled by government stats – NY Post
Manufacturing, housing data flag underlying strength – Reuters
The renminbi’s prospects as a global reserve currency – voxeu
China Now Owns Slightly Less than a Ton of Treasuries – EconPicData
Gov’t Economist: China May Set Lowest Growth Target Since 2004 – Bloomberg
Rep. Issa to question Mozilo on Countrywide VIP program – Housing Wire
RealtyTrac Reports Foreclosures on the Rise Again – CNBC
FHA defaults up for ninth straight month – Housing Wire
Investors hammer SoCal home prices – O.C. Register
Fed’s Tarullo Abstains on Vote to Back Statement of Principles – WSJ
Fed minutes show few supporters for QE3 – MarketWatch

 
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