Monday, December 15, 2008

Oil prices and the Mortgage meltdown.

    Some of you may recall what you had been paying for gasoline in the months before oil prices began to rise; sometime around 12-18 months ago it was $1.50-$1.75 per gallon and oil was trading for $45-$55 per barrel. So what happened, and how does this correlate with the Mortgage meltdown which, was at the forefront of our current credit crisis?
    First, let me say that these two things are undeniably related no matter what you have heard or may think and it doesn't take a "rocket scientist or economist" to figure this out!

    The "Housing Bubble", as they like to call it, had been growing for quite some time and was nearing its peak when "Speculators" began to realize that returns on these investments were flattening out. Let's also take it a step further and say that they began to (finally) realize that there was indeed a "Bubble" being created in mortgages, and the securities that back them, so they needed a "safer" place to begin putting their (and their clients) money.... I.E. energy and commodity stocks and futures. That's right, commodities like grains, pork bellies, yada yada yada, also began to rise to astronomical levels right along with oil!
    So let's back up for second here and ask ourselves where all of the mortgages and securities went and why they became so volatile. In a nut shell, they had been sold and resold numerous times; by the time a bank or investment group finally sat on them for a long term investment the actual risk of the mortgages that backed the notes was ambiguous to the point of opacity. This meaning they looked a lot safer than they actually were.......kinda like putting a fresh paint job on a junkyard car and selling it as "pre-owned" with a warranty! picture a whole dealership full of these!!! That's what the banks who ended up with these mortgage notes and securities had......junk! WHY??? Because of Crooked, Greedy, Salespeople (mortgage brokers)  who originally granted the mortgages, then the Banks that funded the loans...OH and lets not forget the Appraisers who "verified & valuated" the properties backing these garbage loans and the Traders who bought and sold these notes & securities on the markets. 
    So that's how the Mortgage debacle started to unravel......investors began to realize that they had "junk" and began looking for options. Enter the "Speculators"....AGAIN.....

    Seeing that the Housing market was about to unravel, these same "Geniuses" (Speculators) began "Predicting" Oil and Commodities would be the next great thing. NATURALLY, because they had already driven the Real Estate Bubble to the point of bursting, they needed something else to promote to save face with the investor community. WHY??? Probably because they were the driving force behind the bloated housing market and the businesses that look to them for strategic investing information were breathing down their necks. These same "Ninnies" who over-promoted what a great investment the Real Estate Market was, peered into their "crystal ball" and figured that a safer bet would be in Oil/Energy and Commodities. (Real Estate used to be pretty safe too!) They needed to appease many an unhappy investor, who began to realize what they had gotten themselves talked into by these "Slick Willy Speculators"!

    So, they began offing their Mortgage backed Securities to anyone who would take them, and began buying into Oil and Commodity Futures for a safer "position". Meanwhile, the "PR Machines" are blaming the sky-rocketing prices of Oil, Grains, Etc on "Supply & Demand" in a Global Marketplace.......BLAH, WHATEVER DUDES!!! The historical data  doesn't support that argument, so find another schlep to snow! However, most people are lemmings and believe everything they are told, instead of using their brains for 2 seconds to reason out the fact from the fiction being spouted on TV and the newspapers. The FACT is: If Oil prices had been rising from supply and demand, there would have been a HUGE decrease in Supply, or a HUGE increase in Demand.......neither of these happened (contrary to what they said)!! Had demand been increasing during the last several years?......Yes, but not dramatically enough to send the prices to those ridiculous amounts. And what about the other Commodity prices? Was there numerous major catastrophes all at the same time that forced those prices to sky-rocket at the same time as oil?.......I didn't think so.

    So there you have it; I hope it wasn't too complicated.

P.S. Imagine for a moment that Oil prices hadn't risen at all during the last 12-18 months.....what would they be now that this Financial Crisis is affecting the Whole World?? I'm thinking we'd be getting gas for 35-50 CENTS!! (Given the percentage it has fallen.) Think about it....... Oil was almost $150 a barrel, which made Gas $4 or more per gallon (in the US). If it HADN'T gone up, and the price only FELL (from, say $55 per barrel), that would have made oil about $18 per barrel and gas would be...... CHEAP99!!!!!

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