Sometimes there are swift changes in the economy, and we are currently witnessing an era of ever more rapid transition. Even so oil remains the main energy source for the global economy, and the price of oil has risen. The black gold now costs US$ 70 as opposed to US$ 50 a year ago for the benchmark WTI. Of course there are 143 different grades of oil with varying prices according to the attraction each grade has for various refineries. But the fact remains that oil has become more expensive and could easily go up to $80 with some venturing to posit $100 as not being unreasonable.
Global demand may reach 100 mb/d (million barrels per day) in 2018, and supply, though slightly reduced by machinations of OPEC countries, could keep pace with the increase. The resulting higher prices, which are also due to geopolitical tension in the Middle East, mean more income for oil-producing countries and a bonanza for oil companies in general. At the same time higher energy costs mean higher inflation while at the same time they weigh down the growth rate of the economy, which usually turns out to mean a recession.
The Fed is intent on raising interest rates and diminishing its balance, and that usually produces a recession without any help from other factors. This Newsletter has frequently mentioned the increasing federal debt load, now well over 21 trillion, and the extremely expensive equity market that does not seem to correspond to reality.
Anyone can see that the combination of these developments has created a situation where volatility is going to increase sharply. With speculation rife on the stock market spurred by exaggerated earnings expectations, it is easy to concur with David Stockman that the bubble is ready to burst. President Trump takes credit for the economic growth, but he may soon take the blame for a severe downturn.
As if that was not enough, the ongoing tension with China on trade issues and the increasing federal deficits complicate things even more. Consumers are fully leveraged and many corporations mired in debt although those with cash are planning large share buyback programmes, so some analysts see the market climbing to a dizzy 3,000 (S&P500). Portfolio diversification is one way investors can brace for the coming storm. Gold is always a good hedge, and silver coins are useful in an emergency. A sign of the times is that Turkey now wants its gold back in Istanbul.
The petrodollar is under pressure as US GDP is now only 23.9% of global GDP, but 80% of international transactions are in US dollars. Expect change soon.
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