Economics, Portfolio Optimization, and Technical Analysis
|Posted: Wed Apr 20, 2005 8:05 pm Post subject: Letter to the Editor
|Lou, the U.S. economy produces over one-third of
global output, and pulls the rest of the world
economies, through massive current account deficits,
consuming even more than it produces. When the U.S.
economy slows, our major trading partner's economies
(e.g. Japan, Germany, France, Italy, Canada, Britain,
Mexico etc.) will slow. So, you're right. U.S.
monetary policy influences our major trading partner's
economies (which most rely on export led growth).
Consequently, when the global economy slows, demand
for oil will slow. The U.S. is heading into
stagflation (i.e. slower growth with higher
inflation). It's similar to the '70s. Oil prices were
high in the '70s, because of supply shocks from the
Middle East and OPEC. Also, the Fed in the '70s
allowed rising inflation to keep output high (to avoid
another '30s type depression). U.S. output growth was
volatile in the '70s. This time, OPEC is increasing
production at the top of the oil bubble, although
there seems to be little excess capacity to refine
oil. Nonetheless, when demand for oil falls (more on
the production side than consumption side), oil prices
will fall. If a price for a commodity falls, then
profits typically fall. You want to buy stocks where
prices are rising. Also, I'd avoid stocks at the top
of the boom (e.g. in China). The dollar will likely
stay low or fall lower to shrink the trade deficit.
However, with import prices rising, the trade deficit
may finally start to narrow. China is moving from an
agricultural economy into a industrial economy. So, it
needs more oil. However, it seems on the verge of
beginning a bust cycle. Art
> Hi Art
> First off:
> I think your a genuis and the best source of
> unbiased market info.PERIOD!
> I did notice your call on oil and bond market.
> (Luckily, I followed your lead and saved myself a
> small fortune!)
> In addition, I'll heed your warning to be careful
> going foward.
> Let me be perfectly clear on what is puzzling me.
> (Perhaps you can shed some light).
> I've listened to you enough to realize that clip was
> pure TA and not a real force,
> but brought it up to get an opinion out of you
> regarding future of oil.
> Let me elaborate a bit more:
> I subscribe the most successful tracked newsletter
> on record.
> He has his subscribers LOADED UP on oil! His
> subscribers must be taking a beating
> but he's still bullish and holding on. He bases his
> decisions soley on stock fundamentals
> (namely earnings) and uses no TA.
> Savvy equity strategist Jeffrey Saut has been
> bullish for the longest time on "stuff stocks" that
> pay dividends. He says ' be long things countries
> like China and India buy, while avoiding things
> such countries sell' He is so bullish on materials
> that he predicts the Canadian dollar will eventually
> be at par with U.S. dollar.
> Another energy analyst points out that during early
> stages of industrialization oil consumption
> tends to increase the fastest.
> In addition Cramer has oil in his portfolio.
> Recently, you called the possible end of the bull
> market. (I'll take your word for it).
> I think gold is technically well within its bull
> market range.
> I think the fundamentals are sound enough to believe
> that the U.S. dollar is currently doing
> a mini rally within a bear market and should
> eventually begin to fall again.
> This should prove bullish for gold.
> With oil it seems a bit more tricky given the fed's
> During a Cramer tv show, he said that the fed can't
> control China and India and he's therefore
> still very bullish on oil going foward.
> I find this confusing. Coud this be right???
> From my limited understanding, China's growth is
> very closely tied to the U.S.
> In addition, they have a very fragile banking
> Should the fed continue to raise rates wouldn't this
> slow down the Chinese, thereby lowering crude
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