It’s been a bit since my last commentary on the global economy, but things haven’t changed all that much except for a drop in the price of oil.
It has dropped from $135 a barrel to below $125 in the space of a few weeks.
rude oil traded little changed near a three-week low on indications that prices above $120 a barrel are limiting demand for fuel.
U.S. gasoline use fell 4.7 percent last week from a year earlier as motorists cut consumption, MasterCard Inc. said yesterday. The dollar traded near a two-week high after Ben S. Bernanke said the Federal Reserve is “attentive” to the currency’s drop. That may dim the appeal of commodities to investors looking to hedge against a weaker U.S. currency.
“In the U.S., we’re seeing the economic slowdown translate into discretionary reductions in demand where possible,” said Harry Tchilinguirian, senior analyst at BNP Paribas SA in London. “Our view has been for a stronger dollar in the second half of 2008.”
Crude oil for July delivery was at $124.19, 12 cents lower in electronic trading on the New York Mercantile Exchange as of 1:04 p.m. London time. Earlier it fell as much as $1.16, or 0.9 percent, to $123.15. That’s the lowest since May 15.
Oil could actually fall further, and that’s good news, yes?
Maybe. I don’t think so.
I believe what we’re seeing now is the final tipping point into the deflationary slowdown scenario. Demand for goods and services across the board are decreasing alarmingly. Remember, a good two-thirds of our economy is based on discretionary spending on stuff. Bernanke’s remarks on inflation yesterday has signaled a shift in Fed policy. They believe they have the problem licked now, and they aren’t going to cut rates any more, strengthening the dollar.
Treasury prices dipped Tuesday as an uptick in the stock market and a warning about inflation from Federal Reserve Chairman Ben Bernanke led some bond investors to unwind their holdings in government securities.
Bernanke suggested Tuesday in a speech presented via satellite in Barcelona, Spain, that the Fed is unlikely to make additional interest rate cuts because of the rising risk of inflation brought on by surging energy prices. Meanwhile, he predicted the central bank’s rate reductions and tax rebates will bring “somewhat better economic conditions” later in the year.
His tone suggested to some market participants that the Fed is leaning more toward an eventual rate hike than a rate cut. Rate hikes make Treasurys less attractive compared to other assets. So a day after a stock selloff lured many investors to the safety of government securities, Treasurys pulled back again as stocks edged higher.
“The bond market had a couple of good days,” said Jay Mueller, economist at Strong Capital Management. “Some of today’s selloff is backing out of that.”
The Treasury market’s movements were fairly subdued, however, with investors awaiting Friday’s Labor Department report on job creation during May.
“Friday’s the employment report, and that could be very big,” Mueller said. “I don’t know if you’ll see a lot of activity between now and then.”
We could even see rates increase soon. Given the way things are going, that will only make things worse.
By and large the damage to the economy has already been done. Americans are tapped out right now and nearing the end of their credit limits. Personal debt has exploded in the last year as Americans are turning to their credit cards just to stay afloat.
Now imagine the Fed starts raising rates on top of that. Credit card companies won’t skip a beat to pass those rate hikes to consumers who will already be struggling under a ocean of red ink. The results will of course be a completely different kind of “credit crisis” coming for the end of the year.
All signs are pointing to a massive deflationary spiral. The housing bubble popped, the commercial credit and municipal auction market bubbles have exploded, the commodity bubble is next, and the personal debt bubble will follow.
When those last two burst, the economy goes with it.
Be prepared.
