Aiy! We arrived in London this morning, greeted by a dark sky, rain, and wind. Ah, the summer…we hardly knew ye…
What a delightful summer it was! (More below…)
The weather never actually turned summery – until the last two days – but it was still a marvelous respite from the workaday world of September-July.
We went back to the workaday world yesterday – taking the train up to Paris for an editorial meeting with our new French financial magazine. We are taking a risk with the publication – giving it an English title: MoneyWeek. French may be the language of Proust, but English is the language of money.
Oil dropped to a four-month low today, after Hurricane Gustav veered away from New Orleans and towards the Republican National Convention. Now, the storm seems to be winding down – leaving hundreds of thousands of people without electricity, and estimates of insured damage losses at close to $10 billion, but sparing both the city and the oil rigs off the coast.
Poor John McCain: upstaged by wind and rain. But who knows, maybe he’ll be able to make a comeback. Besides, he’s got a young woman as a running mate. Hey,…everybody needs a gimmick. The Democrats have that young black guy. And he’s got an old white guy as a running mate. So you see, the tickets are evenly balanced. Young-old, white-black, male-female.
Remember, elections – like markets – can be fun, provided you don’t take them seriously.
U.S. markets were closed yesterday, but the world of money continued to turn. Asian markets sold off sharply. In Europe, too, equity prices tended to go down, but less so. Oil weakened further this morning, below $110 a barrel.
“You say an increase in the price of oil is ‘ineluctable,’” we questioned the French MoneyWeek team. “A bold position to take…no?”
“Well, it’s inevitable that the price of oil will go up. Supplies are tight and demand is rising. The price must rise too – that is, unless there’s a catastrophic change in the world economy.”
Ah, there’s always a bit of sand in the gears…a little bit of grit that can wreck even the most sophisticated and powerful engine.
An increase in the price of oil looked ineluctable in the early ’80s too. So did higher and higher interest rates – over 20%, in fact. And the stock market was dying too; Business Week magazine announced it on the cover: “The Death of Equities” hit the newsstands in August 1982.
But all those things turned out to be eluctable, after all. The price of oil collapsed to $10 a barrel, interest rates peaked out at 14% for the 10-year T-Note, and stocks got up from their deathbed and began dancing the Hully Gulley, all the way from Dow 750 to Dow 12,000…and then some.
The financial world did an about-face in the early ’80s. After a generation-long period of rising rates of interest…topped by a final squeeze delivered by Fed chairman Paul Volcker…rates were ready to come down – for another generation.
As we explained last week, our guess is that the financial world is about to spin on its heels once more. After such a long period of falling real rates of interest, they should be ready to go back up. The credit expansion of the ’82-’07 will turn into the credit contraction of the next few years – at least, that’s our guess. And again, the previous trend is given – unwittingly – a final push by the Fed. Currently, favored institutions – member banks of the Federal Reserve – can borrow at less than half the rate of consumer price inflation. That makes their real rate of interest NEGATIVE…about -3%.
The Fed also lends to commercial banks – which it regulates – as well as to investment banks, which it doesn’t. The investment banks are the same firms that made such a hash of the mortgage market. But the feds didn’t want to see their friends and contributors from Wall Street get what they deserved. So, they’re bailing them out – openly, as in the case of Bear Stearns…and clandestinely, as in the case of the rest of the street.
And now, everybody’s getting in line for a bailout. The feds have already practically nationalized the entire nation’s housing stock – by supporting Mae and Mac. And Detroit has asked for $25 billion – again, at negative real interest rates!
Where’s the end of the line? That’s not a rhetorical question. We want to know so we can join the queue.
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