Saturday, October 11, 2008

Three Big Bubbles Will Burst: Redux

Starting on May 16, 2008, I wrote a series of articles entitled Three Big Bubbles Will Burst. I want to revisit them and take a look at what has happened.

1. Oil Prices, May 18, 2008. I predicted that they would top out at $150+/-. I missed that by about $3, but it came close to the $150. I also said there would be a pull-back to about $80-$85. We are now very close to the $85.

It does not take a genius to make these predictions, just an observer of price movements and psychology.

At the $60-$80 level, the fundamentals of supply and demand are at work. Anything above or below that mark is speculation, emotion, and fear. All of the price movement up to $120+/- was normal logical speculation by gamblers (the natural course of events). Above that figure was strictly an emotional response based on fear and pure uneducated greed.

We will probably see oil trade between $60 and $70 for a year or so with spikes in either direction. Yes, a down spike could see, if only briefly, oil as low as $30. Unlikely, but possible with the all of the fear mongering out there, economic world-wide demand may drop and form a trading rang between $30 and $60, but I doubt it.

2. The inverted bubble of the dollar, May 16, 2008. I will base this discussion again on the relationship with the Euro. In May it took over $1.60 to buy one euro and the pundits were yapping everywhere that the dollar was dead, and we should think about having a funeral and burial. Today it is about $1.35.

Many events and occurrences have affected price movements in currencies, as well as commodities and stocks, but the forgotten reason is that simply put, the U.S. economic machine is the envy of the world. All of the factors mentioned in the previous article applied here. Yes again there was healthy speculation, but everything over $1.30 was fear, emotions, and an enormous amount of denial, especially with the foreign speculators.

Look for the Euro to work its way down to parity with the $1.00, possibly within 6 months to a year, with a possible overshoot to .80 to .85. I'm already thinking of trips to take to Europe next year.

3. Food prices, May, 19, 2008. Obviously, food prices will drop behind the other two (the dollar and oil), but they will receed. It will be a spotty recovery as production lags in some areas. You can raise a chicken in 6 to 8 weeks, but it takes a cow a year or more. Expect beef prices to rise before dropping, as many herds have been slaughtered to pay bills. Since the whole commodities market has taken a hit, this rise may not be dramatic. Overall, look for moderations or declines within the next 6 months to a year, as growing cycles proceed and farming and shipping costs decrease.

Price movements are more a reflection of emotion than of facts. Fundamentals are always there, but seldom involved in rallies and falls.

Our economy IS fundamentally SOUND. Remember, the media makes it money getting attention, and blood and grief gets ratings. More than ever the major media outlets are willing to bend the truth or down-right lie to get those ratings and make money. As many of them berate capitalism, they are some of the greediest capitalists out there.

BTW, there is still time to get a great deal on an SUV!!

The Hammer

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