October Surprises

A short update here… life has been busy.

Wall Street continues to gyrate wildly.  Some folks are calling for a bottom, some aren’t.   Personally, I think things are so hosed up that even the best & brightest out there have no real idea where the market is at.    On some levels, the current activity of the stock market may not be all that important.

The real action is in the credit markets, where banks are still very leery of lending money to each other.   If you’re not familiar with LIBOR or TED spreads, this would be a good time to become at least acquainted with the terms.  LIBOR rates have eased somewhat, but it still appears that the banks are scared.  Until banks start lending money freely again, the economy will continue to slow down.  And if the price of freeing up the credit market is pumping tons of liquidity (i.e. digital dollars) into the system, that will eventually result in higher interest rates on Treasury bonds and, eventually, all other  forms of credit.  We may keep Wall Street afloat, but if mortgage rates rise to 10% or higher, that will crush the housing market.

Some good news for all of us is that the wipeout in the stock market has forced many hedge funds and speculators to deleverage their holdings.   One side affect of this is the general drop in commodity prices.  Wheat, Corn, Sugar, Oil, Gold, you name it, they all are either falling or staying stable.   For the short term, this means we will be able to enjoy lower prices on many staples for a while.  Gas has fallen to $2.60 in my area and shows no signs of stabilizing.  This is scaring the crap out of OPEC, who was really enjoying selling oil at $125 per barrel or more.    Seeing the price of your product drop by 50% or so will do that to you.

This forced deleveraging in the commodities market is giving us a good look at just how high prices got due to the influence of speculators.    Oil prices have ‘dropped’ to around $70 per barrel right now.   While this seems incredibly low to all of us right now, a few years ago $70 oil was unthinkable.   Short term market influence made the price go crazy for a while, but the underlying struggle between supply and demand is still out there.   If nothing else, a prolonged economic downturn may keep the production peak for world oil output away for another few years.   I would welcome this, wouldn’t you?   Enjoy lower prices for now, but don’t expect this to be a permanent situation.

I’ve been watching the presidential debates… I’m not sure why sometimes, but what the hell, it makes me feel informed.   Barring a sudden resurgence in the markets, I think Obama’s going to be the winner.   The race may tighten, but I don’t think McCain has done enough to convince Americans that he’s the right guy for the job.  Irascible assholes are useful in legislative bodies, but aren’t so attractive in the executive mansion.

One thing for folks to keep in mind… both candidates are talking about no new taxes, or only raising taxes on the rich & big business.  This is typical election year boilerplate.   The fact is that the bills have already been rung up, and they will have to be paid.   If we cannot convince the rest of the world to keep buying Treasury bonds like they’re going out of style, we’ll have to find some way around that.  It might mean raising taxes, cutting spending, eliminating entitlement programs, raising interest rates on treasury bonds, or a combination of those things.  I doubt we will be able to continue functioning the way we are right now for much longer.   The sky may not be falling, but we also will not be able to continue partying on someone else’s dime.

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