Prague Twin

Tuesday, April 18, 2006

Economic Snapshot

Oil has tipped $70 a barrel, again. More importantly, it seems to be consolidating at or above $65. By that I mean each time it comes off this $70 high, it comes off less and less. I doubt we see $60 anytime soon.

The dollar took a pounding yesterday, and the gains made by the majors consolidated today on weak housing starts especially in the west (off nearly 17%). Particularly interesting is how well the Swiss Franc is doing. The "Swissie" as we like to call it, is bought on fears of global insecurity, as is gold. Gold, by the way, is still at 25 year highs with some analysts predicting $800 an ounce before it is all over.

The stock market is perched up at the top end of a mature bull-run. Luckily, the S&P 500 managed to avoid dropping below significant levels that would almost certainly lead to a rapid decline. However, the bears look to be coming out of hibernation, and a bear market could develop quickly should those key levels be reached.

Now I have been predicting a correction in US commodities (wrongly) for some time. Now it seems the perfect storm is brewing. High oil prices, high commodity prices, rising long-term interest rates (the 10-year note finally just broke 5% but backed off of it). If you throw in the Swiss Franc's recent gains, the picture is a little frightening.

Far from the rampant optimism we heard last quarter, people are starting to point out that higher interest rates could lead to a drop in commodities as investors go for the sure bet. Also, the market has oil priced in at $35 to $40 a barrel which is pure fantasy. Corporations have thus far been largely unsuccessful at passing on higher oil prices to the consumer. If they are unable to to do this, we will certainly see the correction I have been dreading.

But once again, I always seem to underestimate the resilience of the US economy. Lets hope I am wrong once again.

3 Comments:

  • By Blogger Stephanie, at 8:48 PM  

  • At the first of the year I said silver would reach $10.50 per ounce by mid year. I just checked it's $14.01 now. Another sign we could be in trouble?

    God Bless America, God Save The Republic.

    By Blogger David Schantz, at 9:11 AM  

  • Precious metals tend to go up and down together, but silver has gone up even more in percentatge terms I think.

    It isn't so much a sign that we are in trouble, it is a sign that people are worried.

    By Blogger Praguetwin, at 9:48 AM  

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