I have 3 goals with my market analysis, and by extension these commentaries:
1) identify objective reality;
2) determine consensus on major issues;
3) discern variant perspective — i.e., where the crowd gets it wrong.
Because of this approach, I am somewhat sensitive to bad arguments, faulty reasoning, and worst of all hypocritical posturing. Before I start kvetching about the inconsistency of some on Oil, let me layout my my prior positions. I have stated that:
• Gasoline Prices (Adjusted for Inflation) are actually not too bad; That even with high Oil prices, the US pays relatively cheap gas prices; And that when you compare other "Refined" Products with Gasoline, it appears even cheaper.
• Last Christmas, I explained why I was Bullish on holiday retail sales;
• For the past few years, I have railed against backing out energy from inflation measures (Inflation ex inflation);
• Finally, I noted in Stop Blaming Oil! that since October 2002, both Oil and the Nasdaq have doubled. The same demand factors driving the global economy were also responsible for sending Oil higher.
Why bring this up? Because philosophically, I have been very consistent: Dollar denominated Oil rose in response to ultra low rates AND global expansion. These energy price increases are inflationary; When prices drop, it bodes well for the consumer; Lastly, even at $3 gas ($70 Oil) its still cheap — but will pinch the lower end consumer.
With all that out of the way, here’s what I find infuriating:
• The Inflation ex inflation crowd is now saying dropping Oil prices lower inflation; On the way up, no inflation due to energy, but on the way down, whoopee! No more inflation!
• Rising Oil prices will not crimp consumers or retail, but dropping Oil prices are a huge plus for both;
• Increased energy consumption is a sign of global economic growth, but decreased prices will stimulate economic growth;
• Commodities were never in a major secular bull market — which is now officially over.
You can make many of the same arguments about Gold, also.
I do not insist that every strategist, economist and analyst reach the exact same conclusion, but there needs to be some consistency and intellectual honesty in the arguments they make.
Heads we win, tails you lose is no basis for analysis . . .
UPDATE September 14, 2006 12:07 pm
Paul Kasriel, chief economist at Northern Trust, agrees that we should temper our enthusiasm for
lower oil prices:
"The stock markets have been buoyed
by the sharp decline in crude and attendant declines in nationwide gasoline, but
because the supply of oil hasn’t increased markedly, and because the global
tensions — Iran, Iraq — don’t show signs of changing, the decline in oil
prices must be due to falling demand — evidenced by a similar fall-off in other
commodities, such as copper, which is down 6% in the last month, and gold, off
7%, and zinc, down 4.4%."
Gushing Over Oil, WSJ
UPDATE September 14, 2006 10:27 pm
Hey! What good timing — Chart of the Day updates their Oil adjusted for Inflation