Professor Elam

What’s
Your Currency?

Imagine that the world is a series of disconnected
islands.  Each island produces a
different product. And so it is necessary for the islanders to trade with one
another to get products not produced on their island. And so the outrigger
dugouts start plying their way from island to island. By mutual agreement so
many pineapples will be worth perhaps a shirt.  A dugout canoe will no doubt command many pineapples as
fruit perishes but the dugout is a long lived transportation asset. Eventually
as trade swells, it is simply too difficult to move pineapples for shirts.
Barter gives way to easily transportable currency.  And so the islands issue their own currencies. The paper
money has its own commodity emblem on the currency. And so pineapple currency
is deemed to trade for so many shirts or even dugout canoes.  Which is all fine, as long as the
island really has the pineapples or shirts to back up their claim to currency.

Well in the big picture of things, nothing has changed. We
all still deal in pineapples and canoes. Governments however no longer tie the
currency to the number of pineapples or canoes they produce. Now currency is
printed at will regardless of the pineapples that stand behind it.  So demand pineapples from that  island in exchange for your currency and
you will get, well, the promise of more currency. Yes, sure, we have a
temporary shortage of pineapples per currency but once the new crop comes in,
not to worry. But indeed, the other islanders, eyeing their hard work in
producing canoes, become reluctant to take the pineapple currency for their
canoes.

Fast forward to islanders traveling by Lear Jets in Armani
suits and gee, here we are. On Wednesday the U S Dollar dropped about 2.9%. The
shares of Transocean RIG rose 2.9%. This is no accident. The traders at RIG are
bidding up the value of their canoe inventory.  A collection of offshore rigs is indeed a collection of
valuable dugout canoes.   And indeed, this morning oil is up about
$2, a bit more than 3%. 

The currency of Andrews, Saudi Arabia, and the Soviet Union
is oil. It is no accident that Vladimir Putin is growing ever more anxious
about using the fragile and multiplying dollar in exchange for his precious energy
supply. After all, other than military, Russia still has no consumer
production.  Our friends to the
south in Mexico face a double whammy of diminishing oil reserves and violence
which  decreases the tourist trade.

On the weekly charts, unleaded gasoline and crude oil have
moved up nicely. This column suggested that $40 would be the level to hold.  It apparently has done just that.  Each trading month has bounced there
since the lows of the fall. Crude oil has now moved up to $50!  Perhaps OPEC has cut back but for sure,
the FED has unleashed lots of pineapple (U S Dollars) currency.   The entire energy complex is not
in gear yet.  Natural gas and
heating oil have not broken to the upside on the weekly charts. No doubt some
of this is that unleaded gasoline typically moves up before the summer driving
season, though that is liable to be a weak market this year. Natural gas is
coming into the buying season for next fall. And so it languishes at $3.75.

This suggests a bear market bounce more than the start of
another move to $145. But for the time being, it should put some back to work.
Baker Hughes just laid off another 1,500 workers, bad move.  Such short term reactions mean
increased costs in terms of unemployment premiums. And then the firm will
scramble to find needed skill sets as demand comes back.  This is a business that requires a long
term perspective.

We do NOT make recommendations here. But our proxy for the
West Texas economy remains Patterson Energy, PTEN. It rose 22% on Wednesday.
Hmm, sounds like dugout canoes (workover rigs) just got more valuable in terms
of pineapple (U S Dollar) currency.