Friday, April 21, 2006

I Don't Get It

As of 9:03 AM, light, sweet crude is trading at $73.18, Brent crude trading at $72.72. Oil prices are expected to climb even higher in the weeks to come because of the political uncertainties surrounding both Iran and Nigeria.

Yet the Dow Jones hit a six year high yesterday
and is expected to climb again today. The talking heads on CNBC have been breathless with their market cheerleading this morning.

The conventional wisdom for the morning is: the Fed is at or near the end of its rate hikes, earnings season has been great, unemployment is low, inflation is contained, everything's great!

But I don't get it. With oil prices over $73 a barrel and gasoline at or above $3.00 a gallon across the nation, how can inflation not be a problem? How can the prognosis for the economy be so optimistic?

Listen, I'm an economic neophyte. I can't crunch the numbers and figure out what's going on. But common sense tells me that while Wall Street and the Bush administration are cheering the economy and repeating ad nauseum how great things are, most Americans are in debt up to their eyeballs, haven't seen a real wage increase in years, are being squeezed at the pump, are facing rising health care, college, and housing costs, and are worried about their jobs.

That, to me, is the economic reality in America today.

But on CNBC its "Morning in America!", so don't forget to "Buy! Buy! Buy!"

And don't worry about oil and gas prices. When you strip food and energy costs from the producers and consumers price indices, inflation's really, really tame.

You just have to learn how to live without eating, driving, or powering your home.

UPDATE: Oil finished above $75 dollars a barrel. The gas station across from my building was charging $3.05/$3.15/$3.25 this morning. Now it's $3.07/$3.17/$3.27. And there's a TV truck outside the station with a camera on the sign waiting for the prices to go up again later this evening.

Consumer confidence wins out. Despite the fact that Americans are now saving in negative numbers, they just keep spending.

There has been a lot of repatriation of capital from overseas since Bush Inc. reduced the overseas repatriation tax rate from 35% to 5% for the whole of 2005. Add the fat tax cut into that and you have an overflow of capital. This explains how commodities are going up, stocks are going up, and profits are soaring.

But it is all fantasy. When the correction comes this time, it is going to be painful.

For all the cheerleading, if you listen to the honest analysts , there is a problem with price power. Corportations have been thus far unable to pass the increased fuel costs on to the consumer because of heavy competition in the market and very high inventories. The market is still figuring that oil will be $35 to $40 a barrel.

The piper will come to call, but you know who is going to pay the price? That's right, the common man who has seen nothing positive out of this boom. When the bust comes it will me layoffs, pay reductions and the like.

I think this boom is pure fantasy. But I have consitently underestimated the resilience of the US market.

The crash won't come until oil hits $100 or the BOJ starts raising rates and attracting capital back accross the pacific. For now, no matter how bad it looks, the US market has little competion around the world.
Wow. Are you saying that a correction is coming, but it may not come for years?

In other words, is George W. Bush going to leave office, like Harding and Coolidge before him, and leave an economic mess (as well as foreign policy mess in Iraq) for the next president (hopefully an adult) to clean up?

Because if that's the case, that's really depressing. I'm not rooting for a crash, but if one is coming, I want the guy who helped create it take the blame.

Thanks for the comment, praguetwin. That helped me.
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