In my post yesterday, "Do We Ever Really Learn?" (Read more) I chronicled the various economic boom and bust cycles that our nation has undergone in just my lifetime. And I posed the question, will we ever learn? Well, after reading today's Wall St. Journal I am lead to believe the answer to that question is a resounding NO!
My example here is the oil market. Over the last several month we have seen the price of oil futures spike up to the $108-110 a barrell range. Just this morning in the Wall St. Journal I read a report that stated that fuel (oil) consumption in the U.S. is declining. Mainly due to the rising gasoline prices. People are becoming more conservative with their fuel consumption and many are trading in the large, gas guzzling S.U.V. (yea!). And this is typical in any ECON 101 economic model. When price goes up demand usually goes down and supply increases. And we're seeing this happen true to form. With one caveat. Speculation!
Much like the housing boom of 2004/05 where speculators thought the prices of homes would go up forever, we are seeing the same herd mentality in the oil futures market. The article noted above mentioned that the price of oil is being propped up by speculators. With the housing bust and uncertainty in the stock market "investors" are now seeking refuge in commodities (oil and gold-more on gold in another post). Alas, the herd mentality once again. I've said it before and I'll say it again. Buy on the rumor, sell on the news. Lately I've been seeing stories on NBC News and CNBC about small drillers popping up all over the American landscape to cash in on the rising oil prices. Well that fits in with the ECON 101 model as well. As prices rise so does supply. Why? Because everyone wants to capitalize on higher prices. But this may cause a glut of oil to come on the market. Throw in the fact that OPEC has not increased prodution but may wait until oil hits $115 or so a barrell then flood the market with oil to capitalize on the higher price. Henceforth pushing the price of oil down. If I were a betting man, I'd be buying oil future puts 6-12 months out or selling everything off right now.
So where to put your money maybe the question. Well, to use another Wall St. adage, "buy low, sell high". And what commodity/investment is at a low point right now. You guessed it. Housing!
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