I've Seen Fire and I've Seen Rain

In my 20+ years I seen (counting the current debacle) nearly everything. There are some things I have seen several times. This includes "new economies" and the rise of foreign economies which will supplant the U.S. was the world's dominant economic player. It was Japan, then the EU and then China. Tomorrow it could be India, Brazil or whomever. What these new-age financial pundits repeatedly forget is that ALL global economies are linked to the U.S. economy.

The current stories are that Europe is suffering along with the U.S. as its financial institutions also invested in suspect mortgage-related vehicles. Making the European recovery job more difficult is that, rather than being a unified economic block, the EU is a loose confederation of states each with its own finance minister and bank oversight. Each nation will have to decide for itself how to deal with troubled financial institutions. Some much for a united Europe supplanting the U.S. as the world's leading economic power.

The same could be said for China. Now that the Olympic infrastructure boom is behind it and its main market for goods (the U.S.) is slumping, China is starting to slow down. The global economic slowdown is causing commodities prices to fall. This evidenced by the fall in oil prices.

Oil prices dropped below $90 per barrel today as a strengthening dollar and softening demand have a deflationary effect. My argument earlier this year was that a weaker dollar and speculators using oil as a dollar hedge helped to push oil prices higher. I also stated that higher oil prices would cause consumers to conserve and reduce demand (to some extent). Now we can see that as the dollar strengthens, oil prices fall. All of a sudden, spiraling demand forces are no longer mentioned.

Although fundamental factors started the bubble in oil prices, as with all bubbles, speculation inflated it to Zeppelin-like proportions. Look for gasoline to flirt with $3.00 in the near future. I would not get too giddy yet as a cold winter could increase the demand for home heating oil.

Have fun, drive carefully and stay warm.