The Monster Under the Bed
Friday, April 27, 2007 | Teeka Tiwari
Three dollars and twenty cents.
That’s how much a gallon of premium fuel now costs at my local gas station. Three dollars and twenty cents.
Less than a year ago, $2 Gas was enough to spark congressional hearings and the dragging of big oil CEOs in front of committee after committee; but today, at $3.20, we hear nary a peep.
Please don’t misunderstand me. I never supported congressional hearings on what is essentially a function of a free market system. The point I wish to illustrate is how we, as a nation, have become numb to rising energy prices. Even more importantly than that, market participants appear to be completely disregarding the detritus effects of $3 gas prices.
If the analysts were gnashing their teeth last summer over $2.40 gas and its cumulative dampening effect on consumer spending, where are they now at $3.20?
I don’t know the answer to that question, either.
What I do know, however, is that elevated gas prices are the equivalent of a global tax increase. That big, sucking sound is our money flying out of our country in the form of Petro dollars, and it would be naive to assume that the overall economy will not be affected because of it.
We are already starting to see signs of this slowing of consumer spending show up in the consumer cyclical stocks as evidenced by the sub par performance of the entire sector vs. the broad market. Two-thirds of our GDP comes from consumer spending. Any notable slowdown by the consumer will spread like a virus through virtually all of the market sectors.
The next sectors that are starting to feel the pinch are the Regional Banks and the national finance companies. It is a very troubling sign when the banks are underperforming the broad market. In fact, every major systemic market breakdown I have ever witnessed was led by the banks.
Is this weakness in the banks portending some future surprising news on the interest rate front as well as a slowdown in consumer borrowing?
There are two immediately apparent scenarios that would force the Fed's hand on interest rates. One is inflation; $3.20 gas certainly qualifies as a red flag. The other is the US Dollar.
At this time, either scenario is simply speculation, BUT if the US Dollar continues to collapse unabated, the Fed will have to step in. Global money cares only for one thing: YIELD. If the Fed decides to get tough about defending the dollar, then the quickest way to stop the bleeding is through raising interest rates.
As for the Fed, they may view this course of action as the magic bullet that kills two birds with one stone, curing both inflation and shoring up the US Dollar. When it comes to inflation and defending the Dollar, the Fed couldn't care less how many get crushed in the ensuing panic that would be sparked by an aggressive rate-raising policy. Remember that. To these guys, inflation is the monster under the bed that plagues their nightmares.
So it’s great to see all-time new highs on the DOW. It’s wonderful to see stock prices up, and, at least for the short term, the trend is higher. But I want you to keep a wary eye on this energy and banking issue because it just may become the story that acts as the peg for the market to hang its bearish concerns on when the sentiment starts to turn for the worse.
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Teeka Tiwari
Chief Investment Officer
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