There are a few things that everyone wants stable regardless in whatever their government policies dictate. Consumers do not want to see inflation in food, energy and shelter. Contrary to what economists say and the media reports, food is up, gasoline is up, heating oil is up and whether you rent or buy, housing is up. Dear reader, the costs far exceed the phony 2% inflation target approach of the Federal Reserve.
Nevertheless, consumers are told that inflation is benign. I, for one, do not believe the government agencies reports on consumer pricing. People don't keep track of stats, but fortunately for you, Sebastian does. The past week was an alarming change in two metrics that could cause an explosion in inflation. If it occurs, I wonder how the powers-to-be will keep the price of gold down?
Last week, the price of oil dropped significantly which is actually helpful to consumers, but the correlation in the drop in value of the dollar will offset the savings in oil. This is where the market is reaching a crucible point.
Major Currencies:
Keep in mind that emerging markets must utilize the US dollar in making purchases in oil. When the dollar rises this adds a burden in costs to these nations. Now, if their other trading partners for example like any nation in the EU and the euro goes up in value, this adds more costs and stress to their economies. This is what is happening in the present market. Then, there is the Brexit situation. What happens to the pound? This too will disrupt world trading and economies. Houston, we have a problem.
Last week change in values.
First, I'll look at the US dollar since it is the world's reserve currency. A distinction that China wants.
* USD - went from a low in February of this year at 88 to a high in August at 96. Then, it dropped to 93, but resumed its climb with a new high at 97. Keep in mind that in 2017 the dollar touched 104. Now, it is holding price at 96.34. This is a strong price.
The strength in the dollar is good for oil producing nations as they get a higher value for their product. I mention this aspect because this week President Trump has imposed sanctions on Iran. He wants a new deal. Under the previous sanctions, Iran saw a significant drop in revenues which led to a big drop in oil production from the 4m to 5m range down to one million barrels in sales. Fortunately for the global community that loss in barrels was made up by increasing production from the US, Russia and Saudi Arabia. The improving world economies from the 2008 crises made demand exceed supply. Prices rose and everyone suffered until the Iran nuclear deal was agreed upon. Iran oil entered the market which led to an oil glut. Prices dropped. Everyone was happy except the oil companies. Many went out of business. Fast forward to today. Now, we are facing world demand with less oil on the market. This major aspect will effect the value of the major world currencies as I repeat in my unpublished book, "All things are connected."
(I will show the change in oil prices after the currencies.)
*Euro - it has declined in value which makes the EUs exports cheaper, but it showed a big jump last week from 1.13 to 1.145 in exchange. This trend could be fast and furious.
*Pound - Brexit fears are building and along with them is what will be the exchange rate for the pound? It jumped from 127 to 130 which is a huge move. Currencies are usually slow like the Titanic turning and for this rapid change in value in one week is off the charts.
*Yuan - the Chinese dollar continues to fall which makes their exports cheaper. Is this a coincidence that the US and China are having tariff tensions as China seeks to be even cheaper for buyers? People, they are the poster child for currency manipulation.
OIL
We can talk about trade, tariffs and currencies all we want, but the elephant in trading is oil. Funny, the Federal Reserve does not include the world's most valuable export in their inflation matrix. Crooks! Anyway, oil has been declining rapidly while at the same time the new sanctions on Iran cuts off a big world producer with world demand rising. This is a conundrum if there ever was one. Oil by the barrel has dropped from a high in August of $77 a barrel to $63 last week. Many see oil touching $58 and possibly $55. Wow! Another way to view the price action in oil is through the oil index(XOI). The value change is mind blowing. The index went from 1600 in October to 1349 last week and it touched 1325. This is less than 30 days. How can that be? Keep in mind that two other producers, Libya and Venezuela are a mess. Prices are falling and one reason is the seasonal factor in oil, but if things remain the way that they are, prices will return to $90 or more early next year. This is what I see. Find a cheap oil stock in December and come next spring, you can go fishing 'cause you will catch a big one.
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