Let’s
review the bidding:
Two
weeks ago I sent out an analysis on the CRB, saying that disinflation/deflation
continued to be the orders of the day and that the CRB should make a new low
over a period of months. No
updates, here – the CRB has generally risen since the analysis, but has not
passed any significant price levels.
Last
week I sent out an analysis on the US dollar, saying that a triangle had formed
and that a breakout, one way or the other, would tell the tale.
This week, the dollar came close to breaking out, but did not break out,
on the down side.
My
main theses are that the bear market will not be over until:
1.
The
Nasdaq goes below 1000
2. Gold goes below 200
3.
The CRB
index makes a new low
In
the next few weeks, I will be sending out comments about gold, US bonds, and the
stock market.
Today,
let’s discuss oil.
In
1999 I said that point C on the graph was as low as oil would ever be, at least
in our lifetimes. Oil is headed for
new highs, which are very high. When
oil was around $12, I said to look for “oil in the mid-$30s by early 2000.”
I then said that in conjunction with my recession/deflation theme that
oil should decline to the mid-$20s, noting that since we would be in a
recession, it would not surprise if oil kept going, further.
So far, so good. Before I
get into thoughts on the future, let’s review the past in constant dollars.
This
chart is in 2002 constant dollars and provides some perspective on oil prices.
The sad fact is that the value of a dollar has decreased dramatically
over time, so that it is not a constant yardstick with which to measure prices
over time. The only way to accurately view historical data is with a
constant yardstick. In this case, I
chose 2002 dollars and adjusted historical prices. The first point on the graph is January 1946, when the price
of oil was $1.17 in 1946 dollars or $11.57 in 2002 dollars.
During my lifetime the dollar has depreciated approximately 90% (prices
have increased ten-fold), a profound political and socio-economic fact we
won’t plumb at this time.
Anyway,
as we moan about the price of gasoline, etc., from the graph it is clear that in
constant dollars, we are doing very, very well. In 1998 the price of oil in constant dollars got down to
equal its post-World War II lows. In
1980, oil reached its all-time high in 2002 dollars of approximately $88 (in
1980 dollars, it was approximately $40 – note that the value of a dollar has
decreased by about 50% - prices have doubled, just since 1980).
Recent prices in the mid-$20s are no where near the peak.
If you would like to ponder why SUVs are popular and why there is little
pressure for oil conservation, this constant-dollar chart speaks volumes.
So,
we are on our way above $40 - and perhaps $88 - in current dollars.
It looks to me like the first leg up is about completed.
The daily chart shows a 5-wave sequence completed, or almost completed,
and stochastics are topping out and have bearishly diverged with price.
Cycles indicate that prices should decline into late summer.
The
rapid changes in the price of oil indicate that supply and demand are roughly
equal and that small changes on one side or the other are resulting in
relatively large changes in price. In
a softening economy, prices should be soft, but they are not.
There are clearly other factors at work.
Some point to Middle East political issues, but I think not, at least not
yet.
Oil
is an intensely political and emotional subject. Some say there is a lot left to be found in the ground and
some say there is not. Some say
that we should drill in Alaska and off the coast of California and some say we
should not. I could pontificate on
political issues, however, as a technician, I look at my charts.
Realizing that I may be wrong in their interpretation and that technical
analysis is flawed, it is more than clear to me that we should drill and drill
now. Our economic well being is
dependent on energy and there is no viable alternative to oil and there will be
no viable alternative to oil for decades. Wind
and tides and geothermal can help, but they are a drop in the bucket.
Salvation comes in the form of conservation, nuclear energy, and solar
energy, period.
How
does this square with my overall theme of deflation? All things being equal, the price of oil should decrease in
recession and deflation, and that is what should be happening now.
Since that is not what is happening now, either there are other, stronger
trends afoot in oil, deflation is over, or oil will have another, strong leg
down.
How
will this all work out? The way
things always work out. To the
extent I am correct, the price of oil will generally rise, and as it does there
will become pressure for government to do something (the singular most
destructive force on the planet), which in turn will lead to regulation of oil
companies, mandatory conservation, increased taxes on oil products and the
opening of currently sacrosanct drilling areas.
However, if I am correct in some longer term trends, the combination of
population demographics and the lack of an energy alternative to oil will begin
to create a crisis around 2020. But
that is the topic for another day. To
leave on an upbeat note, once the current economic downturn is completed – in
2004?- we should be in a fifth wave of the stock market, which will mean
generally good times for a couple of decades.