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Maybe it's just me, but I don't see any great correlation in the picture, let alone a perfect correlation.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu Jan 8th, 2015 at 10:59:07 AM EST
Price was pumped up during QE1, and falls immediately it ends.

Price pumped up again in QE2. Briefly falls once it ends.

Then through Twist and QE3 it's all over the place, but at a high or higher level.  

Finally, QE3 ends and the price has dropped like a stone.

It seems pretty clear to me but maybe you're looking for greater granularity.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jan 8th, 2015 at 08:31:24 PM EST
[ Parent ]
The sharp, unbroken drop at the end begins quite some time before the end of QE3.

There are some correlations which are sufficiently obvious that you do not need to deploy advanced statistics to detect them.

This is not one of them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 9th, 2015 at 01:41:00 PM EST
[ Parent ]
If you subscribe to the brand of pseudoscience known as "technical analysis" you could say that what happens at the end of QE3 is that the Oil price goes through a support trend line. Or something.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Jan 9th, 2015 at 02:47:22 PM EST
[ Parent ]
Well, that could be accounted for by the long period of forewarning that the Fed gave before it actually ended QE. Still, it probably came as a surprise to those who thought they were entitled to free money. The Fed has been saying they would end QE since September. And then Yellen confirmed it after she was appointed. That is about the time the decline began.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jan 9th, 2015 at 03:17:23 PM EST
[ Parent ]
"Don't fight the Fed!" Received wisdom on Wall Street.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jan 9th, 2015 at 03:18:34 PM EST
[ Parent ]
While people obviously react to statements of intent, you have to believe in model-consistent agent strategies to believe that there is a smooth transition from the "action in expectation of announced policy change" regime to the "policy in effect" regime.

If QE were a sufficiently important part of the causal story that you can get away with this kind of ocular econometrics, then there should be a break in the trend when QE actually ends.

And there isn't, so it's not.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 9th, 2015 at 05:59:45 PM EST
[ Parent ]
you have to believe in model-consistent agent strategies to believe that there is a smooth transition from the "action in expectation of announced policy change" regime to the "policy in effect" regime.

For values of 'you' = a significant portion of the participants in that particular market and stragety, yes. I don't have to believe it, for instance. And that could well be the dark side of intellectual capture by 'mainstream economics'. Hoist on their own petard!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 10th, 2015 at 09:29:13 AM EST
[ Parent ]
No, this really isn't a point that depends on what the market participants believe.

If QE had a real, mechanical effect on oil prices, beyond simply general moral suasion, then there should be a noticeable transition from the "QE is expected to end soon" world to the "QE has ended" world.

The totally smooth transition we actually observe is evidence that there is no strong causal story linking QE to the oil price.

The other alternative consistent with observed reality is that all market participants can anticipate the consequences of a world without QE, in sufficiently particular detail and clarity as to be sufficiently well-positioned for the new reality to ensure a smooth transition once QE actually stops being there.

But that last story? That's an unfalsifiable fairie tale.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 10th, 2015 at 10:29:57 AM EST
[ Parent ]
If QE had a real, mechanical effect on oil prices, beyond simply general moral suasion, then there should be a noticeable transition from the "QE is expected to end soon" world to the "QE has ended" world.

Mechanical may be a bridge too far. All that would be required is for a small number of big players, TBTFs, to be concerned that the free money from the Fed was drying up to take action, all the while having their PR loudly proclaiming the opposite. Then some more would pull back out of caution and this would become something that might just start to be perceptible to a broader segment of participants. And that could well happen just when the inflection point occurred. Once the loss of confidence spreads it will take some players some time to exit. Seems that could well account for the shape of the curve. I would be interested in the opinions of experienced market players and may try to solicit some such opinions.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 10th, 2015 at 07:14:31 PM EST
[ Parent ]
Bear in mind that there were in all likelihood only three firms in the know.

BP/Goldman - who had the capital to support the shrinking Brent/BOE market during the first ramp up and who essentially control the Brent/BFOE complex. But by 2009 they did not have the capital to do it on their own account, never mind on the scale the Saudis required.

The third was J P Morgan, the Fed's representative on Earth, who took up the running from 2009 onwards, and even hired Goldman's star trader to do so.

Note that I am not saying that the purpose of QE was to manipulate oil prices, but rather that this was a feature, not a bug.

While Dark Inventory was funded by muppet capital (quasi-equity), this was not enough in itself: there also needed to be a flow of dollars through the market from consumer to producer which JPM was able to access like no other.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jan 10th, 2015 at 09:34:48 PM EST
[ Parent ]
Well, no, I'm looking for statistical evidence of correlation.  This doesn't show that.

It looks to me like the falls you're associating with QE2, Twist and QE3 all began prior to the end of those programs.  Mostly it just looks like the typical noise you see in the oil market.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Jan 11th, 2015 at 09:53:55 AM EST
[ Parent ]
So if you're J P Morgan & Goldman Sachs and you know QE is ending, and you know this will collapse the oil price, what do you do?

You get your retaliation in first is what you do. In other words your traders 'front run' the rest of the market.

And yes, that is indeed typical of markets, but it certainly isn't random 'noise'.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 11th, 2015 at 03:11:14 PM EST
[ Parent ]
On what grounds do you "know" this will collapse oil prices?  That's my whole point.  You haven't demonstrated this.

Your entire point here is that QE props up oil prices.  I'm asking for actual evidence of it, because the chart you've used as "proof" looks like it proves nothing to me.  You're now answering with hand-waving based on the assumption that it does so, because reasons or something.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Jan 11th, 2015 at 06:01:17 PM EST
[ Parent ]
I didn't say it was me who knew. I'm not privy to what goes on in high level meetings which may or may not be written about decades from now in someone's memoirs.

I said imagine that you are J P Morgan and you know because you saw the price drop the first time QE ended? What do your traders do when QE2 and QE3 come to an end?

I'm outlining a theory based on my experience of markets in action; my assumptions as to market behaviour/instruments and my analysis based upon my assumptions.

That's the best I can do, I'm afraid.

Firstly, I provide explanations for market anomalies which as far as I know no one else has explained.

Secondly, I made accurate predictions three years ago (and I don't recall anyone else doing so) as to what would happen as a result of QE ending (Mind you, I didn't count on two more years of Twist/QE3).

Thirdly, no-one has yet poked holes in my case other than to say there is no proof.

As for QE propping up asset prices then I submit there is any amount of academic studies to look at if you're masochistic enough.

Oil is not only a consumable commodity, it is also, when stock-piled (or even left in the ground), an asset which through 'passive' Index Funds and Exchange Traded Funds has become a new 'asset class'.

I have been pointing out for perhaps five years that the 'inflation hedging' mis-sold by investment banks to risk averse 'muppet' investors caused the very inflation these investors aimed to avoid, and in so doing gave rise to a windfall to producers on a cosmic scale.

If you disagree with my assumptions and arguments, or perhaps consider that the oil market price reflects physical - rather than financial - supply and demand then I look forward to hearing your reasoning.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 11th, 2015 at 07:51:24 PM EST
[ Parent ]
Yes, I've read many of those studies.  I don't think those studies say what you think they say.  But that's not the issue at hand anyway.  

You stated the picture was worth a thousand words, and that there was a perfect correlation between QE programs and oil prices -- implying that it was obvious.  I said it was not, as anything with functioning eyes should see if they actually look at it.  I then asked for statistical evidence.  You didn't provide any.

This is just gibberish, Chris.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jan 13th, 2015 at 06:37:47 PM EST
[ Parent ]
Where do statistics even come into this?

I am referring to QE programmes: not to the flow of QE within those programmes.

If you think I am saying that oil prices react to every variation in the flow of QE then you are under a misapprehension.

I'm sorry, but you are the only person I have come across to date who cannot see - just by looking at the chart - that when QE programmes begin or soon after, the oil price rises, and when the programme ends - or just before, then prices fall.

But each to his own.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jan 13th, 2015 at 08:11:39 PM EST
[ Parent ]
There is no way the folks at Chase and Goldman couldn't have known what the end of QE would bring.  As I've been saying for 7+ years, the problem isn't liquidity but solvency, and since QE is a liquidity fix, it had to have some purpose other than actually righting the ship (Many have said that things haven't straightened out because there hasn't been enough QE, that the Fed brought a knife to a gun fight.  Actually, the Fed brought a flamethrower to a funeral: QE was a completely wrong response to the event.).  That purpose was simply to fill Chase's and Goldman's money hoses so they point them wherever they wanted.  They found a way to securitize oil that the Saudis could accept (See my earlier comment on bai' al 'inah.) and went to town with everyone else's money.  They knew that, when QE ended, the hoses would empty, and repositioned themselves accordingly.
by rifek on Tue Jan 27th, 2015 at 02:37:09 PM EST
[ Parent ]
Proofs are for mathematical theorems and for juries. Unfortunately, many, if not most, economists see economics as an axiomatic, deductive 'science', while the rest point out both the absence of any thoroughly agreed premises from which to deduce anything and the lack of agreement between observed reality and the predictions of the axiomatic crews. None of the most important aspects of any science of which I am aware mostly consists of making and attempting to falsify hypotheses based on experiment, which involves additional well known complications in the social sciences.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jan 11th, 2015 at 11:47:51 PM EST
[ Parent ]
Okay?  I guess that's fine.  I haven't the slightest idea what any of that has to do with my comments.  I asked for, you know, evidence.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jan 13th, 2015 at 06:42:38 PM EST
[ Parent ]
You indicated Chris was trying to 'prove' something. He did offer evidence in the form of the graph, which you denies shows anything. I think you are over constraining the requirements by asserting that the rises and drops should be perfectly aligned with the beginning and end of QE sessions. If we are to assume that there is no insider information in play that might be a somewhat more reasonable assumption. But we know that there are massive dissymmetries in information in these markets. Well, Lucas and his lot would disagree.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 15th, 2015 at 12:07:27 AM EST
[ Parent ]
Also, the intensity of QE was not constant. If I recall correctly, it slowed down quite a lot before being stopped altogether.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Thu Jan 15th, 2015 at 05:30:37 AM EST
[ Parent ]
Another confounding problem.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 15th, 2015 at 11:15:55 AM EST
[ Parent ]
What's confounding is to draw a calendar and mark this or that date as the start or end of QE. One would have to at least look at QE purchase volumes.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jan 15th, 2015 at 12:27:50 PM EST
[ Parent ]
A good stock and flow analysis could tell a lot - if the data were available.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 15th, 2015 at 05:06:43 PM EST
[ Parent ]

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