“High oil prices tend to prick investment bubbles.”
History does not necessarily repeat but it certainly rhymes. Think back five years to July 2008 and oil prices peaked at $147 before giving way to a slump to $33 by December as the global financial crisis struck.
This July WTI crude has jumped to $107 a barrel. That’s a tax on consumers and business. Surging oil prices are a proven recession indicator.
Think back to the First and Second Gulf War’s and the recessions that followed. High oil prices tend to prick investment bubbles.
Will it be different this time? Stock markets in advanced nations look very high with the global economy cooling down. House prices have also picked up courtesy of the Fed’s money printing and low interest rate regime.
These are the asset price bubbles that now look vulnerable. Gold and silver have already seen their big correction, and bonds prices have tumbled a huge 40 per cent in two months.
House prices are also now stalling after a hike in mortgage payments over the past couple of months. So why are stocks and oil still going up in price?
This is liquidity driven speculation of the sort that always ends in tears. Buying an asset class close to the top of its price cycle is always a bad idea. You have a lot of risk and little room for gain and much for pain.
Speculators always reckon they can close out their positions before markets reverse. But their track record is not good. Most get caught out in leveraged positions as markets head south and lose their shirts.
Yes the Middle East has geopolitical issues by the bucket load but there is nothing new and local civil wars and social and economic unrest are perhaps too much of a preoccupation for anything really exciting to happen.
Cash is king?
It would be far more sensible to liquidate and go into cash at this point and/or put money into assets that have already hit bottom, or must be very close to it like gold and silver.
We think high oil prices are an obvious red flag warning of trouble dead ahead for global financial markets.
Of course, $107 is lower than $147 in July but the global economy is in a much weaker condition that it was then and will therefore breakdown at lower oil prices than it did in 2008.
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