“Market Update: January 30, 2006
Watch out for that oil spike!
The big news last week was that the Gross Domestic Product grew by only 1.1% last quarter, as fewer people bought cars, appliances, and other durable goods.
The GDP is generally considered the best measure of the U.S. economy – except when the news is bad. In this case, Treasury Secretary Robert Kimmitt dismissed the results, saying “We think those figures are anomalous and out of step with the other figures showing the strength of the economy both now and in the future.”
(Even funnier was the headline for Reuters’ article on the subject, which read, “US Trsy says GDP data out of step with economy.” Does it not occur to anyone that perhaps it is their optimism about the economy that is out of step with the data?)
At any rate, we wish we had Kimmitt’s access to data from the future. It would make the job of choosing good investments so much easier.
Instead, we must rely on data from the most recent past. In this case, even if the GDP figure is revised upwards, as often happens, clearly economic growth is slowing.
What has not slowed, unfortunately, is the relentless march of commodity prices. The CRB commodities index hit another new high last week. Copper, silver, gold, and many others are in clear uptrends.
You may recall the high oil prices last September that were attributed to the devastation caused by Hurricane Katrina. At that time, the Dec. 2006 oil contracts reached a high of $67. Last week these contracts closed at $68.42, only this time there is no Katrina to blame. Oil, like every other useful substance we pull out of the ground, is simply getting more valuable.
With commodity prices rising, we are not surprised that inflation, no matter how you measure it, is also on the rise. That’s even true of core inflation numbers, which were also up last week, and whose seasonally adjusted 5-year chart shows a smooth line rising at a 45-degree angle.
In fact, today’s situation reminds us most of those bygone days of Stagflation, when the economy puttered along as inflation accelerated. We hope this is not the case. But unlike Kimmitt, we feel obliged to trust the data.
Moreover, we feel today’s inflation is the result of factors which will not go away anytime soon – namely, the strength of economies other than our own. The U.S. only accounts for 20% of the world’s gross product, after all. Economies such as Japan, Europe, China, India and others (let’s call them JECI for short) are showing strong growth, even if ours is not. The leading indicators in JECI currently point to even higher growth. That’s good news for the world, but not so good for the U.S. It will bring the U.S. dollar under more downward pressure.
Last year, what gave the dollar some strength was that short-term interest rates were rising faster than those of JECI. But if America’s growth is slowing, our new Fed Chairman Bernanke is not likely to continue raising interest rates faster than JECI’s. That robs the dollar of its advantage, and means that the dollar will be back under the control of fundamental factors such as our massive trade deficit. In short, the dollar will resume falling. A lower dollar in turn means higher inflation as Wal-Mart starts hiking prices for most products on its shelves.
On top of that, a growing JECI economy means higher demand, and higher prices, for commodities, including the precious metals such as gold and silver. Gold seems to have left $500 behind, and is in a strong bull trend. Silver broke above the $9.50 level last week for the first time in many years. Coeur D’Alene, a silver stock we’ve been following in our Aggressive Trader service, is up some 74% since last April, and now seem to be closing in on its previous high of $5.21.
However, stagflation is not all bad …
OUR DEPENDENCY ON THE KINDNESS OF ROGUES
The economy can live with stagflation; it did in the 1970s. It may mean lackluster returns from the S&P 500, but energy and precious metal companies experienced the biggest bull market in history during the 1970s, and may do well again. The other stocks that should outperform are those with very high earnings growth, such as our Internet stocks, Yahoo and Ebay.
The danger we must be ever on the lookout for is an oil spike. Today, oil prices are being driven higher by 1) a long-term gap between supply and demand and 2) the political problems within the world’s largest oil producers.
Last Thursday – to pick the most recent example – Iran’s president threatened to put an embargo on oil exports from his country if the IAEA refers the issue of Iran’s nuclear program to the UN Security Council. Eoin O’Callaghan, an oil analyst for BNP Paribas, warned that such a move could push oil prices over $90 a barrel – exactly the type of spike we have been fearing, because it would mean we need to switch to a more defensive investment posture.
We have said several times that America’s dependence on rogue nations for our oil supply is our biggest liability. From Iran to Nigeria, Venezuela, Iraq, Saudi Arabia – all the big oil exporters are either undeveloped, unstable, or renegade economies. The reason for this is simple. All the stable, developed, friendly countries that have oil are already using all the oil they produce and, like us, are looking to buy more.
In a recent article by Fortune Magazine writer Nelson Schwartz, billionaire investor George Soros is quoted as being “very worried about the supply-demand balance” in oil. What’s more, Soros comments, “Iran is on a collision course and I have a difficulty seeing how such a collision can be avoided.”
If that isn’t enough, the article also quotes Hermitage Capital’s Bill Browder who thinks oil could reach $262 a barrel.
My new book, The Coming Economic Collapse (which was finished last October, and will be released next month), makes a similar prediction.
So where does that leave us for the near term? Right now, stocks are still enjoying seasonal strength, having recovered a little last week. And this strength may continue for the next two weeks or so. However, our Master Key is still close to neutral, so after then all bets are off.
Again, I must stress: keep an eye on oil. If it does experience a spike above $90, that could create weakness in all stocks, even energy stocks, as it would imply the start of a recession.
Until next week,
Stephen Leeb
Editor, The Complete Investor
P.S. In the near future, we will be sending you a Special Opportunity to receive a FREE copy of my new book, The Coming Economic Collapse, when you renew your TCI subscription early. Meanwhile, don’t forget your friends and relatives can now preorder copies at 34% off the cover price on amazon.com. (Makes a great birthday gift.) |
