An Uncertain Economic Boom
These are really weird times. A recession is waiting in the wings if it is not already here. But it is not the usual recession where nobody is spending and people are losing jobs. During this uncertain economic boom employment reports show that hiring continues and unemployment is at historic lows. People are making money but supply chain disruptions have caused scarcity of goods so that demand exceeds supply and drives prices up. People are upset because wages are not keeping up with expenses. The New York Times compares this situation to that in Western North Dakota during 2010 oil boom in the Bakken shale deposits.
Williston, ND, 2010
In 2010 there was an oil boom in Western North Dakota. The use of hydraulic fracturing and horizontal drilling made extraction of oil and natural gas from the Bakken shale formation extremely profitable. The oil rig count went over 200 in 2012 and each drilling rig employed at least 125 workers. North Dakota is a sparsely populated state with fewer than 700,000 people at that time. Williston had about 16,000 people and did not have housing for more. Thus oil drilling employees and anyone else lived in mobile homes brought in for the purpose. Prices went sky high as a hamburger cost $20 which was when McDonald’s raised their price for a hamburger to $1! This situation reminds one of stories from the mining boom towns in the 19th century where gold or silver was discovered, prices skyrocketed, and then everybody left when the gold or silver ran out. On a larger scale today’s economic boom feels like boom times in the Bakken shale or a 19th century mining town.
Are The Rules Different for This Recession?
Certainly part of the problem is that Congress, the Federal Reserve, and two presidents pumped money into the economy to fight the pandemic recession and later to jump start infrastructure repairs and bring critical industries like computer chip manufacturing back to the USA. However, a lot of spending was bottled up during the pandemic as savings rates soared among those who still had work. The recovery is impressive but costs are up as consumers effectively bid for scarce products and services.
The Uncertainty Factor
Although the root causes of inflation are different for the US economy today and Williston, ND back in 2010 one thing is common. People are uncertain about how long boom times will last. Oil companies are raking in profits due to the war in Ukraine and sanctions on Russia but are unwilling to invest in more drilling and infrastructure for fear that peace will happen and prices will go back down or that the Fed will badly overshoot as they raise interest rates and drive down oil and gas demand along with the US economy.
The Federal Reserve and Interest Rates
The Fed dragged its feet in deciding to fight inflation. They are now raising interest rates and cutting back their bond portfolio at a steady pace. Fed speak being what it is one has to parse the words when these folks explain what they are doing. They clearly do not want the US economy to tank and they do not want inflation to get worse. Unfortunately, money policy works for problems caused by money. It does not always work for problems caused by scarcity or products and services. It is a valid concern that the Fed will dally around with too-slow interest rate raises and let inflation get worse and then overreact with excessively high rates and kill any and all economic growth and jobs.
At Top Gun Options we are always concerned for the wellbeing of our fellow Americans. However, we do not go and hide under a rock. Rather we trade options and potentially print money no matter which way the economy, inflation, or the markets are headed. This is not a good time to be trading alone. Consider signing up with a trading squadron at Top Gun Options today.