Oil and Food Prices Falling, Real Estate Stabilizing, Stocks Soaring, Crisis Over?
Stock-Markets / Credit Crisis 2008 Jul 24, 2008 - 08:52 AMBy: Money_and_Markets
Imagine the following: The price of oil falls back to $107 ... gas prices drop to say, $3.50 a gallon or lower ... and food prices decline 10% or even 20%.
Simultaneously, the real estate market stabilizes. Foreclosures peak ... new and existing home sales pick up ... and consumers start spending again, opening up their wallets and purses.
What do you think the social mood and economic environment will look like if all that were to happen?
Naturally, the pundits on Wall Street will jump for joy, forecasting Dow 15,000 or higher and an end to the bull markets in gold and other natural resources.
In Washington, politicians will be talking about how our economy is the strongest in the world. Ditto for the Presidential contenders on the campaign trail.
And naturally, the Federal Reserve will claim victory over the worst financial crisis to ever hit the U.S.
Would Wall Street or Washington be right to make such claims?
Well, they can say whatever they want.
But that doesn't mean you should listen to them or that they're right. Let me tell you right now — under the scenario I laid out above, any signs or claims that our economy is recovering or that the boom in natural resources is over will be dead wrong.
Don't misunderstand me, I am not a pessimist.
To the contrary, I consider myself an optimist. I believe in mankind's ability to overcome any obstacle. That's especially true here in the great U.S. of A., where we have one of the world's most resilient, innovative, and hardest-working cultures on the planet.
So why am I warning you?
Because I think a pause in all the recent market trends is about to happen — right here and now — and I don't want you to be fooled by it, or the talk that will surround it.
If you are, you will likely make some of the worst investment decisions of your life.
Up first, since this market is already taking a reprieve ...
Oil: Has It Peaked For Good?
Not on your life. While I do expect a major correction that could bring oil down to the $107 level, no way, no how, have we seen the end to the bull market in energy.
First , from a purely technical point of view, a sharp but short-term pullback in the price of oil is warranted. Indeed, I warned you about it a few weeks ago.
Let's not forget that oil has rocketed ...
688% higher from its low of $18.65 at the end of 2002
152% since the beginning of 2007
So the correction you are witnessing now is perfectly normal and healthy for the oil bull. And it will merely be a setup for the next leg higher.
After all, what is the most basic definition of a bull market? One where prices make "higher highs" AND "higher lows."
The "higher low" component is exactly what oil is doing now — making a higher low, albeit over $100 a barrel!
Second , while official stats show a 3% decline in U.S. oil demand in the last six months, there is no sign of demand destruction in India or China.
Hard to believe, right?
But here are the facts ...
China imported 11% more crude oil in the first half of 2008 than a year earlier. In May alone, China's crude oil imports leapt by 25% to their second-highest ever.
Moreover, its oil consumption is estimated to jump 63% in 2020 as compared to 2006.
Demand for oil in India grew by 4.7% in the first half of this year. Demand for diesel climbed by as much as 25%.
And that's just those two countries!
Meanwhile, on the supply-side of oil ...
- Canada's oil production peaked in 1974, Egypt's in 1993, Syria's in 1995, Ecuador's in 1999, Yemen's in 2001 and Mexico's in 2004.
- Oil production is past its peak in 33 of the world's 48 largest oil-producing countries.
- Even in Saudi Arabia, oil reserves are past their peak. The world's largest oil producer is finding it has to increasingly pump large amounts of water into its biggest oil field, Ghawar, to extract the remaining fuel out of it. A fuel which is of far lesser quality, no less.
Third , any uptick in the economy, even if it's temporary, will just be more bullish for oil.
Let's say the price of oil pulls back and finds a new base at around $107.
How high do you think oil will soar when there's an uptick in the U.S. and global economies (even if temporary)? Remember, its base will be almost 10 times higher than it was when the bull market began!
See, $150 oil doesn't seem so incredible when we're talking about support at $100 or $107. Even $200 doesn't seem so ridiculous, does it? It's amazing how used to higher prices we all get!
So, is the long-term bull market in oil and energy over? As I said previously, not a chance! I think the above facts and thoughts put it all into perspective.
Bottom line for oil: Keep your eyes peeled for my updates, especially in Real Wealth Report . I intend on using this pullback to position my subscribers for some mind-boggling profits on the next leg up.
Next ...
Has the Boom Ended for Other Natural Resources?
My answer: Also, no way! Like oil, many commodities were overdue for a sharp price pullback. They've soared for months on end without a decent retracement and shakeout. So, any pullback is unequivocally normal.
That applies to gold ... silver ... copper ... platinum ... and base metals like zinc, nickel, and aluminum. Plus, coal ... agricultural commodities ... and more.
But I repeat: It's nothing but a normal correction in a very strong long-term bull market. A process whereby "higher lows" are made, in a stair-stepping climb to much higher prices in the months and years ahead.
Indeed, you can see it in the chart of the CRB index, a basket of 19 of the most widely traded and used commodities on the planet.
Notice that awesome uptrend. Notice how even a 20% correction wouldn't change the long-term picture of the CRB index one iota.
What's more, the fundamentals continue to support the long-term bull market. I won't go into details here because you already know from my writings how three billion souls in India and China are driving this bull market in natural resources. Their demand, pitted against limited supplies in many natural resources, is the primary driver behind the bull market.
I will merely add that no matter how bearish any pullbacks may appear on the surface, always look below the surface and keep in mind the long term, which includes ...
The Worst Behind-the-Scenes Inflationary Spiral Ever To Be Seen In this Country
I estimate we're only about halfway through the inflation process that the U.S. is being put through by the powers-that-be in Washington, namely the Federal Reserve.
Already, in just the last two years, $4.3 trillion in fiat money has been created. But by the time the mortgage and credit crisis passes, hundreds of banks will have failed and I calculate the Fed will have to pump at least another $2 trillion into the economy.
Under our fractional reserve banking system, where every $1 of new money created by the Fed creates as many as $10 through relending, that means more than $60 trillion in fiat money could ultimately flood the economy.
Even if it gets back to a factor of half that, or 5 to 1, we're talking as much $30 trillion in fiat money working its way through the economy.
Inflationary? You bet it is.
A systemic devaluation of the dollar? Absolutely. It effectively slices the purchasing power of your current dollars in half, or worse, by increasing the existing supply of money by almost 200%.
In plain English, that means if it takes you $50,000 to break even today, a few years from now it could take you double that, or $100,000 — perhaps even more.
That's why — without question — you need inflation hedges ...
... and why, no matter what, I don't want you to be fooled by any short-term price declines in those hedges.
Now ...
What about the Dow?
As I pointed out in my January 17 and March 18 issues of Money and Markets , and again recently, the Dow is headed much lower.
Look at the updated version of my previous charts, and you'll see what I mean.
Important note: Once the Dow closes below the 11,000 critical support level on the charts, I expect to see it plunge to at least 9,200.
But if you're thinking of riding that out, think again: The ongoing devaluation of the dollar will make the decline much worse, and you stand to lose as much as another 50% of the purchasing power of your money.
That's another critical reason for you to keep your inflation hedges and buy even more on dips.
Best wishes,
Larry
P.S. To find out more about how the Dow is going to lose another 50% of its value ... how you can avoid being caught off guard ... and profit as well, please see the latest issue of my Real Wealth Report .
For just $99, you can get an annual subscription that includes 12 monthly issues, all my special reports, and loads of profit opportunities.
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