I am observing an almost mythical obsession with “$100 per barrel of oil”, as if the integer (100) itself holds sway over the outcome of many other events. And, indeed, while the achievement of such a milestone might have consequences of significant proportion, what seems lost is the journey to that milestone.
Like it or not, inflation.
Americans are paying nearly 87 cents more per gallon of gas at the pump this year than last, and the purchase price of fuel has doubled in the last three years. Unless your wages have increased at such an exponential rate, or your dentist, doctor, or restaurateur has lowered prices by thirty percent per year, you are falling behind.
Being held hostage to petroleum prices is not limited solely to transportation expenses. The cost of vinyl and other plastics found in computers, housewares, medical technology, and recreational equipment is tied to the price of finding, extracting, refining and delivering fossil fuels. In fact, the number of wage hours required to purchase consumer goods of all kind has increased in the last decade faster than wages themselves.
Consider that global savings rates are at their lowest level in a generation, and discretionary consumer spending (a measure of psychological and fiscal well-being) has decreased in each of the last three years.
Our “integer obsession” about $100 per barrel masks the bigger picture that the trend in energy prices (and costs in general) has been rising steadily since the late 1990’s and has triggered a price pressure/inflation-driven economic expansion. It’s no accident that real estate and other tangible assets have risen sympathetically during an era in which portfolio price expansion was at its greatest.
By widening the aperture of evaluation rather than focusing upon a magic number, it’s possible to understand that $93 is no better or worse than $96, except for the vector direction itself and the magnitude with which that trend is moving. That is why I recoil over business news analysis that a change of $1 in oil prices caused the markets to go up or down. In fact, it is the upward trend itself which is confronting this market, this economy, with an enormous obstacle from which to recover.
A growing number of companies are losing earnings momentum because they are unable to maintain profit margin in the face of increasing expenses. Still, others are recoiling from bad investments and write-offs related to the credit crunch worldwide. We know that declining portfolio balances affect capital expenditures in the boardroom and in the living room, without prejudice.
A shifting landscape.
There is such global malaise today, that psychology plays a greater role in portfolio performance than does fundamental analysis. Taking care of essentials is the first priority for today’s households, as well as the foundation for prudent corporate governance.
Overlaying these particular concerns (about energy and inflation), most of the markets’ sectors are responding uniformly negatively. Market indices have reached peaks and begun modest retracements. As I wrote last week, the most significant analysis going forward will be to determine if we can hold existing upside support levels, or whether the flood of bad news will cause the market, and the sectors within, to breach those support lines and reverse course towards a protracted bear phase.
There is no question that the markets were accelerating at an unsustainable pace. Low interest rates, and leveraged spending, caused a manic bubble whose progression made today’s inevitable fall more drastic. Whereas nominal fundamentals are indeed weakening, I see no cause for abandoning hope about global expansion and market rotation. But the fact that the excesses carried forth with such abandon previously is now the pill we are forced to swallow in response to that mania.
Ultimately, as my work has historically shown, cycles play out, both up and down. The time is now to recognize our fundamental difficulties and to prepare for the response that is most necessary and appropriate.
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