Will $135 oil bring Wall Street crashing down next week?
Posted on 22 May 2008 with no comments from readers
You have to wonder which shoe is going to drop first: the oil price or Wall Street? A sell-off in stocks last night might well be the start of a serious correction for US equities which look particularly overvalued given the obvious strains now showing in the US economy.
Yes, the Dow Jones is an index and we have seen a rotation out of financials and builders and into the energy companies. Indeed, the energy component of the Dow is now expanding and the financials are in retreat from their record recent representation.
However, the whole valuation of the market is based on what we know to be wholly unrealistic profit projections for USA Inc. Inflation is pushing up costs while recession is limiting the ability to raise prices sufficiently to offset inflation.
The cause of this inflation is the Fed’s bail out policy of two per cent interest rates and massive liquidity injections into the financial system. M3 money supply is growing around 20 per cent and that means inflation as more money is chasing the same volume of goods and services.
Now we know the US consumer is also being squeezed by rising mortgage payments, petrol and food prices, and is also feeling less confident about family wealth because house prices are falling. So the likelihood of a consumer led recession is obvious, if the US is not actually already in one.
Rising oil prices just add to the woes of consumers and producers, and might well be the trigger for a big sell-off on Wall Street which seems to have forgotten to ‘Sell in May and go away!’ this year.
Surely too the Street will soon begin to digest what President Obama will mean for the US economy. Typically big business dislikes democratic administrations with their propensity for spending, although it is the political uncertainty of a new incumbent that will weigh most heavily on nerves at this stage. Markets hate uncertainty!
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The smart money is gently building a position in Uranium, – metal and miners.
Gently does it, below the radar.
Share tracker funds are moving.
Yes that does appear to be the case – that is a hard asset related to the energy crisis – but how much of this crisis is Fed inflation and how much down to genuine supply shortages?
“but how much of this crisis is Fed inflation and how much down to genuine supply shortages?”
Fed is increasing M3, and depreciation the $
China is increasing M3, but yuan is gaining against the $.
Imports and exports tell the story.
It is a situation of a global competitive devaluation of currencies to retain, if possible, purchasing power parity, within the norms of movements created by trade imbalances.
Holders of billions of $ currencies and T-Bills have to do this to preserve the value of their holdings in terms of $.
The liquidity sloshing around the globe as a result of volume of money expansion has to find a profitable home.
Consider Silver for example.
The London Bullion Management Association traded nearly 30 billion ounces of silver last year.
The Futures and Options Exchanges traded almost 60 billion ounces last year.
All of the real physical silver that is delivered to end users (mostly industrial users) is accomplished by means of over-the counter contracts known as “forwards”. This IS NOT ACCOMPLISHED IN THE FUTURES MARKETS!.
The total silver supply is roughly 1 billion ounces per year.
What exactly is the trade in silver, at 90 TIMES the physical entity of that which it purports to trade?
It is “funds” trading paper silver, trying to make a profit, at the expense of competing funds.
This is increasingly happening throughout the world, as sloshing money seeks a profitable home.
In so far as equities reflect real life, and have inbuilt valuation metrics, they represent a very limited house for sloshing money.
Commodities have no such metrics, and become inflated, but certainly not to the extent that MSM would have you believe. The costs of incremental extraction are increasing because of oil, steel, copper, manpower shortages, prior underinvestment, etc, and so we see a multiplier effect on the end product, with a little inflation here adding to a little inflation there, etc, etc.
The looser?
Joe public, pensioners, savers, etc.
Wealth gravitates increasingly to the wealthy.
Where does it end?
Will it all unwind?
Probably, almost certainly.
Will it be cataclysmic?
ABSOLUTELY.
There are roughly 370 nuclear reactors in the world.
We will need about 1200 in 10 years to satisfy energy demands, (I hold peak oil to have passed 2 years ago, and I have lots of data)
China, South Korea, and a few other “third world nations” are building them like crazy.
The US, UK, and EU sit and argue with nimbys and greens!
Hell, we can’t even get decent planning consent speed for wind farms, and decent feed-in tariffs for solar in the UK, we won’t install modern cables for high voltage power transmission, either in the UK or US, (big power losses) and we won’t build “distributed” power generating infrastructure!!!!!!!!!!!!
All these are happening at light speed in SE Asia.
IN 15 YEARS THE WESTERN DEMOCRACIES WILL BE “THIRD WORLD”
Our self important, self absorbed, social engineering mad politicians are jackasses.
I need a drink, pass the brandy please Pete.
Thank you