Many senior Wall Street traders and corporate executives left early yesterday to enjoy the long Thanksgiving holiday. As I was combing through the latest insider buying and selling data, I noticed that activity was unusually light.
On Friday, the equity markets will close at 1:00 pm ET, so expect some wild gyrations today and Friday.
Here's what's going on;
-Oil prices are just shy of the $100/bbl mark adding more misery to consumer’s pocketbooks. Don't you find it odd that oil prices jumped over $3 per barrel just before the Thanksgiving holiday?
The excuse for the rise in oil was the dollars drop against the Euro. The Dollars fell as investors felt the Fed would lower interest rates after their December 11th meeting. This information became apparent after Freddie Mac (FRE) warned it may have to cut its dividend because of losses related to home foreclosures.
The Set-Up for the Perfect Storm
Here are three events that are coming together to form the Perfect Storm. The only question now is how are the financial markets going to handle it, and are the pieces in place to keep us from repeating past disasters. In some cases there are; in other cases, I'm not so sure.
1) Inflation: Without a doubt we are experiencing an inflation rate similar to the early 1970's. Milk prices are around $5.00/ gallon, commodity prices are out of control, energy prices are at all-time highs.
One of the pieces in place to avoid a disaster is the flaw in the U.S. governments reporting of the PPI and CPI numbers. If these numbers accurately reflected the real inflation rate, the stock market would be much lower, and interest rates would be much higher.
The good news here is the government data does not accurately reflect the inflation rate, so the Fed can use the current inflation numbers to justify lowering interest rates.
Since Gold prices don't lie, you and I know what the real story is. But, for the time being, let’s be glad the numbers don’t tell the real story.
2) Energy Prices & The Asian Market: With oil prices near $100/bbl, and the U.S. dollar at record lows, one way to reverse the trend is to create a protracted correction in the Asian markets.
In 1997-98, the Asian financial crisis was initiated by a drop in the value of various Asian currencies. While the circumstances are different, an overheated economy in China coupled with a currency that is falling along with the dollar, the Chinese may be forced into allowing their currency to float freely, or risk continued depreciation in the Yuan.
Recently, China's central bank took steps to slow its economy by ordering commercial banks to raise the key reserve requirement a half a point to 13.5 percent by November 26.
A slowdown in Asia is already happening as $100/bbl oil is beginning to impact growth. In addition, higher rates on deposit are making savings accounts more attractive while higher lending rates are discouraging borrowers.
A slowdown in the Chinese economy will have a spill over into commodity export countries like South America, Canada, and Australia which export various commodities and natural resources. As a result, energy prices should correct sharply during this period.
3) The Credit Crunch: I guess we didn't learn much from the real estate debacle of the 1980's. Mass euphoria fueled speculation in real estate, and to get their piece of the pie banks overextended credit to anyone with a pulse.
As a result, many loans were issued on falsified appraisals, risky loan programs, and to borrowers who had questionable ability to payback what they borrowed.
If we flash-forward to today, much of the same activity that took place in the 1980's happened again. in the 2000-2003. The question that remains is will we go through the same pain that investors experienced in the 1980's. Based on the large amount of insider buying by directors, and executives in the financial sector, I would think not.
Where some will experience a large amount of pain for their irresponsible financial bets, others will make a fortune picking up the pieces.
