Thursday, July 17, 2008
I have been noticing that the headlines used by the media during the past month seem to evoke fear. An example of some of today's headlines: "Oil Prices Plunge More Than $10 a Barrel!" "Fed Chief Details Woes in Markets, Housing, Jobs" "Bush: Troubled Financial System is Basically Sound" "Wholesale Prices Soar in June; Sales are Sluggish" Fear is what many Americans are feeling right now. They wonder if the financial system will be okay and more important, if they will be okay. We are driven by our emotions and the emotions of others around us. The more negative the news, the more negative and fearful we become. We are "news junkies" who need a constant infusion of the "latest news." The problem with all of this is that it does not give us perspective or context of the events happening around us. Most media personalities have little understanding of how the events fit into a broader pattern of economic and social forces. For example: What does oil plunging by $10 a barrel really mean? It likely means that some of the speculation in oil is giving way to more realistic pricing. If this trend continues inflation will be lowered and the value of the dollar strengthened. When the Fed chief details the "woes," do people realize that what he is saying is that the growth we are having is likely to be less than anticipated and that he still expects the economy to grow during 2008? When President Bush talks about the financial system, he is really saying that the government believes that the actions that are being taken by the Fed and Treasury will alleviate the current problems. Saying wholesale prices "soar" is simply saying that the "real inflation rate" which includes fuel and food, is rising at an annualized rate of 13.2 (1.1% in June multiplied by 12 months) as opposed to the "core inflation rate," which does not include the volatile fuel and food sectors, which is rising by an annualized rate of 2.4% (0.2% in June). Real people eat food and use energy! Until June when the Fed finally started to mention the real inflation rate, they had been consistently looking at the core rate of inflation and indicating that inflation was not a big problem. They now "get it" and will do what they need to do to contain real inflation. The inflation rate has meant a higher amount of income is going to essential expenses (food, fuel), leaving much less for other spending. I still believe we are going though a recession that is similar to the one we had in 1990, along with a bear market in stocks. The confluence of a bear market in stocks, a bear market in housing, and rising oil and food prices is unsettling. In the bigger picture, these events are setting the stage for the next new direction of the market. I am already seeing articles about new developments in "Green Technology." Keep oil up in price and, in the long term, the US will respond to become more self-reliant, stronger financially and better disciplined.