Oil's Well That Ends Well?
I have mentioned a couple of crazy notions on Urban Digs regarding a slowing world economy and increased unemployment actually being a positive for the U.S. You can read about it in my pieces World Economies - The Tide's Going Out and Oh Behave! Inflation.
I know you may be skeptical, but the self reinforcing cycle of higher oil prices, tapped consumers, mortgage defaults and a weak dollar, to me was economic kryptonite. It was necessary for this cycle to be interrupted to avoid dire consequences and I now believe that it just might have been. I can be a little bit of a conspiracy theorist. I love to quote an old institutional stock broker of mine, who had previously been an ATF officer. He used to say "just because I'm paranoid doesn't mean someone isn't following me." I don't actually believe that the interruption in the vicious cycle has been rigged despite the jawboning against speculators. I think it's more a case of supply and demand finally overcoming financial players.
It is now becoming the consensus view that world economies are slowing. David Malpass, former economist for Bear Stearns, was talking about it this morning on CNBC, and the big reaction to Dell's earnings on Friday, clearly underscores world stock markets' worries regarding the remaining leg of earnings support being kicked out. The slowing world economy makes oil and other raw materials cheaper, and it makes other nations stop raising interest rates. It is already making some nations lower them. This does a lot to allow the Fed to cut again if need be, without causing U.S. bonds to be dumped, driving up longer-term interest rates.
The reason I think that the vicious cycle may have been broken, is that we are now entering territory in the commodity price decline where the question of short-term correction versus long-term correction is coming into view. Witness the chart below on oil:
In this chart from StockCharts.com, you can see the 200-day moving average on crude at $111.17. As of this morning oil was getting creamed and trading at $108. If oil in fact closes below the 200 day, on a big breakdown of this nature, it portends future, longer-term weakness. I don't mean much lower oil prices. I simply mean a much longer healing process before oil can make any attempt at the old highs. Just for anyone who is overly focused on Hurricane Gustav, expectations of a more serious outcome may have helped prop up oil and the disappointment of bulls may be making the sell-off that much more dramatic, but commercials should be stepping in to buy big time around the 200-day moving average, if they are strongly bullish at these levels. I'm not a bear on oil, I just think its roll in inflation may be pulled off the table for the next 12 months or so. Note that the CRB Index, which has a very significant weighting in oil, and is a measure to which many big passive institutional investors index their commodity bets, broke its 200-day moving average a couple of weeks ago.
So the good news is bad news on world economies and commodities? I am not here to tell you that the economy and markets are going to get better soon. In fact, I think we are in a long-term deleveraging cycle, which I will be writing about soon, and which portends very poor growth in the U.S. for at least a couple of years. Check the chart on debt to GDP from Noah's piece Peak Credit & What That May Mean if you want to scare yourself.
I've asserted before on Urban Digs that banks need lots of time and a steep yield curve to heal their balance sheets (at least those that will survive). If world growth slows and we have more unemployment it will certainly hurt, but it's a slower decline, during which many resources and investor dollars will be marshaled to try to forestall a banking debacle and depression and profit from the avoidance of the same. So the not-so-bad news is that soaring oil and an imploding dollar are a very quick trip to the poor house that we may have squeaked by.
From the Blogosphere:
The developed world economy has slowed
Crude oil, gold, copper lead decline in commodities in London
Comments (6)
"I think we are in a long-term deleveraging cycle" -- Absolutely! This should make everyone very cautious about NYC real estate for a long time.
Posted by Jerry Manuel | September 2, 2008 5:26 PM
Oy! Another pun.
Posted by Nobi | September 2, 2008 9:42 PM
It seems to me that the holders of cash are desperately looking for someplace to put it. Today the dollar is up and oil is down. Right now I'm not sure I'd bet intermediate-term on the dollar. Yes, Europe and Asia are tanking along with us, but in terms of Europe, I'm afraid, with the exception of a few toxic countries (UK and Spain come immediately to mind), the US's underperformance will seem stark.
Posted by brenda | September 3, 2008 6:22 AM
I will try to refrain from further word play Nobi. I agree with you Jerry that there continue to be risks to New York City real estate due to the shrunken opportunities for financial services companies and their support industries and risks to the quality of life. These may be somewhat cushioned by the tight market and lack of supply growth, particularly in Manhattan, ex Harlem. The boroughs and Harlem could see a pretty tough stretch. As far as the dollar goes Brenda, I'm not sure I see a lot of further appreciation soon, but I think the collapse is over and with it the parabolic rises in commodities. But I wouldn't be too sure France, Italy and Germany will stay looking better than the US for too long. As the US, China and India slow they certainly will, but inflation pressures may persist a little longer due to greater wage indexation.
Posted by jeff | September 3, 2008 7:37 AM
Sorry Jeff, you write what you want.
After this oil demand destruction, I think it'll go parabolic as well. Question is when? You can't dig more or build new refineries or slow the fundamental growth of China and India in just a few years.
Posted by Nobi | September 3, 2008 9:31 AM
I guess we'll have to see. For Italy, at least, property transfer taxes are extremely high, which I understand reduced speculative investment (similar to the transfer taxes that Japan changed to fuel growth).
Yes, I think things are deteriorating oversees now, but I believe the dollar has been at almost $2.00/pound for about two years, long before we imploded (or, more accurately, began imploding), and long before oil topped $100/barrel. I must confess to being curious about what caused the recent runup in the dollar.
Posted by brenda | September 3, 2008 2:56 PM