Thursday, October 05, 2006

Oil prices are falling, but the sky is not.

What a beautiful call Jim Rogers made on natural gas!

See a recent discussion on natural gas prices here:

CNBC via MSN Video: Wild Action in Natural Gas.

You can chart natural gas prices via symbol $NATGAS on StockCharts.

Additionally, OPEC is now indicating that it will pull 1 million barrels of oil a day off the market, as I predicted they would probably have to, based on Boone Pickens call that oil was going down due to a slowing economy. Oil appears to be trading up right now, but this fairly quick action (assuming it happens), also suggests OPEC is seeing some pretty decent weakness in the market.

Another question this raises for me is if the plunge in oil is a result of a US or global recession that is developing, will trying to hold $60 make that situation worse? Assuming the plunge is warning of recession [which is not altogether clear, but has to be on your radar as a possibility], I think $60 is probably too high. But in terms of peak oil and the need to develop alternatives and encourage conservation, it may be for the best.

Finally, Ben Bernanke, Chairman of the US Federal Reserve, yesterday declared that the US was undergoing a "substantial correction" in housing. Which brings me to the following:

The yield curve is inverted, which means that long term rates are actually lower than short term rates, an unusual condition.

Long term rates are driven by the bond market, while short term rates are driven by the Fed. If the yield curve were not inverted, and long term rates had their normal relationship to short term rates, long term rates would be higher, and since long term rates in turn drive traditional mortgage rates, one has to wonder how much more "substantial" the correction in housing would be if those normal relationships were now in place.

This is a long way of saying that the Fed very much appears to have basically no way to go but down with interest rates, it's just a question of how soon.

The bond market has been of the mind that the Fed had no place to go but down for some time now. The stock market is also apparently convinced that the Fed will either hold or ease down soon, leading to a soft landing.

Inflation, by the way, does not appear to be much of a worry to anybody anymore, including the gold market, with the notable exception of the Fed, a former Fed Chair, and Mike Darda of MKM. Obviously, there is inflation out there, but it does not appear to have moved into the labor market in any meaningful way, and debt levels being what they are (generally high-ish), the thought creeps into my mind as I listen to some Fed members that perhaps they are busy fighting the last war.

Along with OPEC trying to negotiate a falling oil price, this is all going to be very interesting to watch.

Does everything fall into place just so, leading to a soft landing? I'm pretty skeptical, but I will try to keep an open mind.