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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 ]

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