On the energy front, we’ve seen several days of declining prices recently. Oil has led the way, falling from about $146 to $121. Coal and natural gas sold down, as well, as did many energy companies and service firms.
So we’ve seen quite a tumble, led by declining oil. But then again, oil had quite a run-up. I’ve said before that oil was climbing too far, too fast. And over the past few weeks, oil tested the $150 mark. But like Gen. Pickett at Gettysburg, this charge to $150 failed.
What seems pretty clear is that at $140, a lot of things in this world just don’t work anymore. Airlines are, obviously, one business not built around highly-priced oil. Worldwide, 24 airlines have gone bankrupt so far this year.
But there are other parts of the transport system, the food system and the economy that are cratering with the oil run-up.
Sure, a lot of things don’t work well even with oil at $130, $120 or $110. But that’s not the point. It seems that above $140, the developing world just stops developing. We saw pain at $100 and above. We were beginning to see true demand destruction above $140. So oil pulled back, and perhaps for a while.
I should add that the recent rally in financials pulled a lot of money out of oil.
Last week, the US monetary authorities made a fateful decision. Rather than let Fannie Mae and Freddie Mac fail, or take these two horribly mismanaged firms over via receivership, the US Fed and Treasury Department, essentially, nationalised the bad risks and socialised the losses. This is going to come back to haunt and hurt us, like a guy with a chain saw on Halloween night.
Efficient capital markets? No way!
And despite the oil pullback, crude petroleum is still double the price of what it was just two years ago. So we are living with a 100% increase in the nominal oil price.
The oil run-up was not all just insatiable demand meeting flat supply. I’ve discussed this in other articles. The US dollar has been mismanaged for decades, and thus we live in chronically inflationary times. And couple this with the horrid shenanigans of Wall Street and the overall US banking system in this modern era. Ugh!
Remember how some people used to dismiss the fact that the US was deindustrialising? Remember how some people used to praise the so-called “service economy”? They would say things like, “The US capital markets are the most efficient in the world.”
To which we now reply, “Oh, really?”
How could the US banking and finance system ever have gotten so bad? Don’t we have regulators who are supposed to look over the shoulders of the bankers? Don’t they teach people how to be careful in business schools? Heck, here at Whiskey & Gunpowder, we’ve been writing about the looming implosion for several years. It’s not like it was some state secret.
So now we are at the moment of decision. How many billions of dollars does the US banking system have to lose? OK, how many tens of billions? Hundreds of billions? When you add in the toxic derivative instruments, it adds up to trillions of dollars. And it looks like the nation is on the hook for a lot of it.
Where can things go from here, what with all that worthless paper floating around?
I understand that the Fed does not want to raise interest rates. That would just plain hit the economy in the gut with the left fist. The politicians would scream. But when the Fed wimps out, the dollar declines in value. And the cost for foreign imports, such as oil, rises. That hits the economy in the gut with the right fist. One way or the other – a left or a right to the gut – our US economy is getting beat up. I’d prefer it if we just took our own national medicine and stabilised the dollar.
If the dollar stabilises, oil should level off. And we could see the market begin to recover. So watch the dollar for your signal.
Meanwhile, the gold and precious metals stocks benefited from the declining dollar. Toward the end of June, most gold stocks all had good run-ups as the dollar fell.
You can’t really time these kinds of moves over the short term. But over the long term, the US dollar has been declining in value. And precious metals have been climbing. My colleague Ed Bugos, a true gold bug, foresees gold at $1,200 per ounce by early 2009. Another precious metals trader of my acquaintance is forecasting silver at $26 per ounce. If that happens, the mining stocks will soar.
• This article was written by Bryon W. King for Whiskey and Gunpowder