Macro Economics
Thoughts on Oil, Gold, Interest Rates

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By washcomp
July 30, 2009

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The Fed has all but announced (supported by Tim G. in China in his comment that we will be back to a sustainable budget in 2013) that they will be holding interest rates low through the 2012 election.

There is also an implication that they will be coordinating the suppression of oil (and as commodities are now linked by ETF's, etc.) gold. Increases in commodity prices will force not only the US, but our allies into a deeper recession.

That means that inflation will be the likely result by the end of 2010 and commodities may rise by then.

While the financial crisis has been addressed, the economic crisis continues to get worse. Statistically, we may look like we are declining slower as we are now beginning to compare figures to those which already reflect a recession. This may appear, on a relative basis that things are beginning to stabilize, but on an absolute basis, they are still getting worse.

Various statistics such as the unemployed still on the Federally reported 26 week unemployment insurance may diminish as the big "lumps" of more than six months ago fall off the end of the statistic, but this does not mean that additional unemployment is being abated.

While the stimulus packages are assisting states in keeping their employees working, I think there is little incremental affect on our current economy. This is unlikely to change without a "forced" solution (think WPA, but possibly pointed toward a renewed energy grid, rehabilitating infrastructure or other specific task).

I figure that stocks currently are way overbought and will correct through into October. At that point, stocking up to take advantage of a year end rally and holding until the beginning of February might make sense. That said, while it could be said that this is going to be a "trader's market" a more polite term would be that those with a LTBAH mentality should pick their horses and put them away until the end of 2012. That would be the point that it would be rational to go to cash and wait for the higher interest rates which have been telegraphed for 2013 and then stock up on fixed income. I expect another recession in 2013, but hopefully it will be relatively short lived as the higher interest rates stabilize the value of the US dollar.

One of the "upsetting" factors could be a meltdown in the Chinese market over the next year if they are not careful. This would also be likely to play havoc with commodity prices.

While long term, commodities will do fine, over the next couple of years, especially considering the universal drop in worldwide demand, they may be dangerous to your blood pressure.

I would think that the saying "you make your money in stocks, but keep it in bonds" will make sense for those willing to switch horses in 2013.

But I could be wrong - usually are,