As we entered 2010 last year, I think overall most people were fairly pessimistic.
- Are we coming out of a depression/recession?
- Are we entering a double dip recession?
- Is there actually a light at the end of the tunnel?
All good questions and honestly I am not sure we know the answers to those questions even today, although I think most people are feeling cautiously optimistic. What has really struck me of interest of late is the change in some of the basic economic principals that I have thought were right up there with apple pie and motherhood. In other words they would always stay the same.
10 Year Chart of the US Dollar
The first chart that I’m confused by is that of the price of gold. I know investors who have been bullish on gold for over 20 years. Obviously only in the last few years has it really gone up. My long-standing theory on gold was it would only go up if inflation was running rampant. Yet gold is around $1400 and it's hard to figure out whether inflation is a problem or not, but it for sure is not running rampant. Also, if gold goes up, I thought the dollar would have to be headed in the exact opposite direction. Granted the dollar is no shining star, but it also is not at lows and seems a little disconnected with the price of gold at the moment.
5 Year Chart of Gold
Another area I am more than slightly confused on is mortgage rates. For a while mortgage rates have been kept at very low levels in order to spur the housing market which in turn would help jump start the economy. Well I don’t think that has worked in any way as the banks never seemed that eager to really loan money out unless you had a top notch credit score. Which of course if you had a great credit score your need for an ultra low rate was probably not that vital.
Lower rates have always spurred the housing market, yet this time there was little noticeable affect. Now what happens as rates start to go back up this year? I don’t know but it seems like a real issue in my mind since I think we need a housing market recovery which trickles into the economy in many different ways.
One final area that seems to have changed is the price of oil. Once again we are headed towards $100 oil and yet no one seems to be worried about the affect on the economy. Keep in mind oil has only once in history been over $100 and that was when it went all the way to $150 and then to dropped to almost $30. The bottom line is higher oil price translates directly into higher gas prices at the pump. I have read this statistic before.
For every penny the price at the pump increases, it costs consumers an additional $4 million. If the price rises a dime, it means consumers pay $40 million more each day that 10-cent hike is in place.
10 Year Chart of Oil
So even though the economy is still bumping along, the price of a barrel of oil seems to continue moving upward. In fact many will not be surprised to see $120 oil this year. Yet I have to wonder why oil is going up and won’t it have a huge negative impact on the economy?
I think this recession's impact is much further reaching than I had previously thought. Maybe we need to rethink everything we thought we knew. If the economy can start to recover even though the 3 items above seem to be headed in the wrong direction than it is obviously time to rethink the new paradigms.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.