Money does not move to stock. It just vanishes. If everyone were to cash and move to stock, houses should slump and credit will be disappearing!!!
The only way to goose up the stock market is to create fresh credit (at a faster rate than housing crash) - ie by lowering fed rate so that Stock market can consume more credit and increase the P/E ratio. Do you see that on the horizon?
I've a feeling, the Fed is hoping the following: Houses slowdown significantly and then they can lower interest rates. It has always worked in the past (like late 80s, currency crisis etc). But, this time (it is different?), I believe, the dollar is going to fall (not 100% as some are expecting -but may be 10%). The house slow down will cause foreigners to pull out of asset market in US. This would cause the hot potatoes to be passed around, causing dollar to collapse. There is not much for foreigners to "buy" in US using those securities. Which necessarily means, they sell it to someone else at a lower price!! This dollar collapse (say 20%) is going to price the oil higher in USD even if oil falls 15% in Euro!! (i.e if USD falls 20% against Euro and Oil falls 15% in Euro, it implies, oil rises 5% against USD!!). This oil price rise is what FEd will be scared of this time and not lower interest rates.
If there is slow down, why doesn't oil price fall faster than slow down? During the boom time, oil price doesn't rise as fast as the boom. This is because, the excess capacity gets soaked in during the initial stages of boom. As the boom proceeds, buyers demand more oil and hence, seeing the demand, speculators and buyers place orders for more oil in the FUTURE. Because the current producers see lot of demand in future, they keep jacking up the price!!! Currently, the speculative money is pushing in besides the buyers demand, and fooling the producers that, future demand is high. In other words, the current price is high because of anticipation of future demand (this demand is priced in today's oil price). The producers use these high prices to invest in production. In the initial stages of bust, the speculators might be slow to see the bust and the buyers might not anticipate the exact rate of slow down. As Fed keeps interest rate relatively low (4.75% is low in my mind) and keeps spitting out "wrong" statistics like CPI is low, GDP growing etc. the speculators and buyers dont ratchet down their future demand fast enough!! Thus in the bust time, the demand falls slower than the actual consumption rate. Speculators might hold oil by buying it in USD. However, they might find that even if demand falls and say oil falls 15% in Euro, the speculators could still make 5% profit if USD falls 20% against Euro!!! i.e If the USD falls faster against Euro than oil falling in Euro, the speculators are still going to make money. This I believe is what is different this time compared to the past. The easy money has allowed speculators to be thrive in the commodities as well!! All the speculators who bought metals and raw materials in USD will still be benfitting if these raw materials fall in price at a lower rate (say against Euro/gold) compared to USD falling against Euro/gold. I believe, Fed must soon start protecting the dollar from falling faster or else, the speculators in commodities will start making more money and the PPI in USD will rise higher!! The Fed's slow rate rising campaign and false GDP/CPI statistics have ratcheted up speculators future demand. Today these speculators think Consumers can easily handle $90 oil, more sugar, copper, metal prices - no problemo. If it becomes a problem, Fed will lower rates and hence the demand must be stoked!! So the speculators dont immediately lower the future demand (or lower the future demand at a slower rate) and hence the producer will not lower today's price much faster even if the actual consumption is slowing (the speculators are the key who make the actual demand appear higher!!!). So my guess is, commodity prices are going to fall much slower than economy. And if USD falls (say against Euro), the commodities might even go higher in price before falling eventually (after the speculators have lost their shirts). Every slow down in the past (most of the late 90s), USD has appreciated. I'm assuming, this time, it will not. |
