Today feels earily like September 2001. Following 9/11, the US Stock markets were closed for about a week – when it was time to restart trading, the market was very fearful. That day, and for the next few days – the S&P 500 index dropped exactly 5%. Each time it dipped slightly below, it would immediately move back to -5%. The only explanation for that I could come up with was heavy government intervention. In the end, when playing long vs short contest of wills, fundamentals mean nothing – the one who runs out of money first loses. If the U.S. Treasury is playing against you in a game of “chicken”, you will lose.
Given all the threats in the world today, this should be a very volatile trading day, but it’s almost like nobody showed up for work – gold, the Euro, oil, stocks have barely moved up or down all day. This is not “natural”.
There’s a great deal about the markets I don’t understand, Art. What puzzles me of late is the drop in oil prices. It seems counter-intuitive to me…I figured oil would start moving up. Has demand dropped? Shouldn’t the price of oil reflect such negatives as the BP leak and DC’s heavy-handed treatment of the oil industry? I appreciate any and all valid information.
The reality for a while has been that while people price oil with dollars, most of the middle east oil is paid for with euros – if you graph the price of oil in Euros/barrel, it’s a much straighter line. The reason oil went down was largely due to the Euro losing value compared to the dollar. It takes fewer dollars to buy more euros. An oversupply of oil and fear of reduced demand are factors. Contrary to the fearmongering of the peak oil people, there is no imminent shortage of oil. Viable proven reserves are around 1.2 trillion barrels – the US burns about 20 billion bbls a year. Oil companies are not going to drill wells today for oil that isn’t going to be needed for 25 years
the same thing is driving the US stock market – most of the day to day up and down of the Dow/S&P has nothing to do with earnings reports or economic news – it’s currency fluctuation. Defacto the world thinks of prices in Euros, not dollars. When the Euro weakens the US indexes go down – when the Euro goes up, the S&P goes up. Wall Street media types haven’t realized this – or if they do, they don’t want to alarm the public that the United States has lost control of our nation’s economic destiny.
So will the collapse of the Euro lead to a sharp decrease in oil prices? Or am I oversimplifying this concept?
My crystal ball is imperfect but China is probably more of a factor. Batchelor’s guests have been ringing the alarm bells that a collapse of the Chinese economy is imminent – it’s the growth in China (and the sheer number of people) that has been driving up commodity prices.
The United States could probably get by without middle east oil – the past 20 years we have shifted to Canada, Mexico, Nigeria and venezuela as our main sources… The recent discovery off Brazil will further change things – it’s Europe and China who can’t afford to piss off the Arab countries – although they have a lot of influence on the global finances. Keep an eye on Dubai.
The dollar/Euro rate is the thing that most affects us, but Japan is also a factor. Back when there was some doubt about the dollar, money rushed into the yen.
If Moody’s downgrades the US credit ratings, all bets are off. The value of a currency is mostly driven by the future ability of a government to generate income. We’re getting in fairly bad shape on that issue, but fortunately most of the rest of the world is in even worse shape.