Ben Bernanke the man who saved us from a depression along with Paulsen, President Bush and yes, even Obama, is currently between a rock and a hard place.
Gas is now over $4.05 a gallon even at the Thrifty gas station on the corner of Rinaldi and Balboa. In downtown LA at the corner of Witmer and 6th Street at the Union 76 station it is over $4.30 a gallon.
The interesting thing is that there is no shortage of oil. The rise in prices has been caused by the problems in Libya which only produces 2% of the worlds oil supply. Most of that oil goes to Europe. None flows to the United States.
Saudi Arabia has said that it would make up for it. Kuwait a major supplier has complained that the price is to high. OPEC feels comfortable at around $90 per barrel. As long as the "Arab revolution" stays out of Kuwait and Saudi Arabia oil should stabilize and drop under a $100 pb.
The problem has been the futures market. There are two type of players in the futures market. The greatest number are what are know as hedgers. A hedger would be someone like American Airlines. They depend on jet fuel for their airplanes. They buy future contracts on oil in order to assure themselves of a price that they can still make a profit.
A futures contract is a contract that someone sells guaranteeing a price in the coming months or year. There are future contracts on any commodity you can think of. Coffee , bacon (pork bellies), wheat, corn, soybeans, gold, silver, crude oil, gasoline, natural gas, cattle, sugar and any other agricultural, financial products we consume.
The other players are speculators. Traders who buy or sell according to their hunches or technical charts. That means that Forrest Gump could take a position in the oil market and influence the cost of a gallon of gasoline. At ETRADE there are even mini-future contracts so even the poor can trade energy and other commodities.
When refiners such as Valero buy crude they buy it on the "spot market". The "spot market" is the actual real price of a commodity such as oil or natural gas. The problem is that the "spot market" price depends on the future prices. So in the end the price of oil isn't set by the evil corporations or demand and supply but it is set by the futures market where YOU and even your mother in law can speculate with small amounts of money.
Gold surged to over $1500 and ounce before falling back to below $1500.
With gasoline, gold and other commodities such as vegetables and fruits, any item that is either trucked or flown in will go up in price due to the rising cost of diesel and jet fuel.
How do you fight inflation? You raise interest rates that is how.
The problem is that if Bernanke raises interest rates it will kill the moribund real estate market.
In Kahlifonia, only San Diego (must be due to the Chargers) actually had a rise in property prices that last quarter. A whole 0.1 %. There are still a huge number of adjustable rate home loans. Over 30% of homeowners are under water. Meaning that the amount that they owe on their home is more than the house is worth.
There is even a website named www.Youwalkaway.com. They coach you through defaulting on your mortgage even if you can afford the payment.
There are no questions asked about the morality of walking away from a contract, a promise or a pledge.
You lose you walk awayÔÇª.by the way as slimy and corrupt as Wall Street seems, you can't do that on Wall Street. You lose, you lose no walking away. No money to cover away you go to Federal prison as did Bernie Madoff..
So this is where Ben Barnanke finds himself. Raise interest rates, real estate tanks and does a double dip. Hard political decision as many Americans have their nest egg invested in real estate.
Don't raise interest rates and inflation raises its ugly head. Bernanke has been a genius up to now. Let us hope that the Force is still with him.
Alberto Marrero Salas:
worked on Wall Street at Merrill Lynch and Prudential Bache in the 70's and 80's when being a yupie was cool and as Gordon Gecko said greed is good. Email the author