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Did Navy SEALS Kill Inflation?

|Includes:AAL, LUV, Target Corporation (TGT), WMT

The price of oil tumbled Thursday and Friday to well below $100. Conventional wisdom is that this was due to the strengthened dollar and corresponding silver collapse. But the dollar only strengthened 2% on Thursday as oil was falling 9%. Something other than dollar strengthening was in play.

There are a few alternative causes- increase in margin requirements, lack of short sellers, but I'd wager that it's a renewed respect for American resolve. And this renewed confidence, emerging from the success of the mission to bring justice to Osama Bin Laden, could spill over into other markets, including other commodities, US equities, and long bonds.

For the past 18 months, a standard meme has been that the US Federal government would be unable to deal with the looming entitlements tsunami, that the Federal Reserve would collude with Treasury to monetize US debt at unprecedented levels, that foreign trade partners and debt customers would lose confidence in the value of the US dollar, that the price of commodities would soar and inflation would spiral out of control, and either hyperinflation or default would create a fiscal, economic, and social collapse.

This possibility cannot be discounted to zero; default remains a possibility as there are committed conservative ideologues clamoring for the near-destruction of the US Federal government by holding fast to the current debt ceiling. But the political will shown by President Obama in taking decisive action to kill OBL on Pakistani soil- eschewing many in his party who abhorred unilateral action- could forshadow addressing other challenges, where the US has the ability and only needs to apply the will. This includes not just entitlement reform, but also domestic energy production. With the cost of fossil fuel alternatives estimated below $50/bbl, it could just be a matter of more supply coming on line in response to price signals.

And if "yes we can" extends to drilling in the kind of seismic zones that Russia and Vietnam have plundered, if it extends to more refining capacity, and if it extends to broad adoption of ridesharing IT (one example can be found at www.pacerideshare.com/en-US/), then the price of oil could fall back to $80/bbl or lower over the long term. This means retailers such as Target and Wal-mart, and airlines, including Southwest and American, should perform better as their fuel and shipping costs fall while their customers have more money to spend on goods and travel instead of commuting.

And since inflation has been and will continue to be offset by cheap labor (given an enormous output gap that will only grow as automation and productivity tools are adopted around the world), the best hope for cost-push price increases was energy. The rediscovery of American competence, starkly unveiled in Abbottabad, could be the death knell for inflation, and the drops in silver and gold could be extended to other commodities, long term interest rates moderate further. Lastly, multinational equities should hold steady for a bit, and then advance as the US and global economy strengthen near the end of next year as the Fed (and ECB) continue their easy money policies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: TGT, WMT, AAL, LUV