Today, we will discuss only one topic: oil.
Since the end of June, Oil, as measured by the WTI Crude Oil price, is up 36%, from around $67 to around $91 per barrel. Is Oil going to the moon? Is this the start of an inflationary cycle?
Let me answer that question by presenting two charts. Here’s the first chart, with a trendline drawn from the lows in April 2021 through the lows in the fall of 2021:
As you can see, after the big spike in 2022 due to the was in Ukraine, oil pulled back to the trendline, and the recent upswing in oil has only taken the price back to the trendline.
You could easily make the argument that after the big increase over the summer, the increase is done, and the level around $91 per barrel is significant resistance, and oil will pull back from here.
That’s the technical analysis argument. The fundamental argument is that we are obviously in a recession, and in a recession we drive less, and ship less goods, so the price of oil will fall. Makes sense. The charts and technicals are in alignment.
Here’s the same chart, but this time the trend line is fitted more closely to the lows in April, September, and December 2021:
With a slight shifting of the line, it would appear that the breakout in oil is significantly higher than the trendline, and therefore the recent move in oil is a true breakout, and higher prices are ahead.
I have also added a horizontal line indicating the double top in October/November of 2022, which could indicate the next level of resistance.
The same charts, with different lines, give different outcomes.
That’s why technical analysis is not a guaranteed sure fire way to make money.
My assumption is that we are in a recession, and while oil may trend towards $93 or higher, I would not be better in the farm on a return to $125.
I can earn 5% or more on cash, and inflation is less than 5%, so for the first time in a long time I can earn a positive real rate of return.
So, for now, I’m content to sit in cash.
We shall see if that was the correct decision.
The 5 Year Yield
by JDH on September 23, 2023
Let’s start with a scary chart, and then look at an even scarier chart. Here’s the Canada 5 Year Government Bond Yield, going back to 1995:
As you can see, the yield is now at just over 4.2%, the highest level since November 2007.
Remember what happened in 2008? Scary, eh.
Let’s zoom in for an even scarier look:
On March 24, 2023 the 5 year risk free government bond yield was 2.66%. Today it’s 4.20%. That’s around 60% higher.
The yield is 20 basis points higher just this week.
So why is this scary? Because the 5-year yield is what determines 5 year residential mortgage rates, and, by extension, all mortgage rates in Canada.
5 year mortgage rates tend to be about 100 to 120 basis points higher than the 5-year government bond rate, so they are now around 5.3%, and heading higher. A 5 year variable rate is 5.9%, so clearly the lenders expect rates to continue to go higher.
That’s not good, if you are a borrower. Costs are going up.
But here’s the key: there’s a time lag. Interest rates have increased from virtually zero to over 5% since March 2022, but the world has not ended. Why? Because of the time lag. If you locked in your 5 year mortgage three years ago, nothing has changed for you.
Yet.
But when you renew, you get a big shock, and that’s when you have to decide whether or not to sell your home and downsize, or deplete your savings, or make budget cuts in other areas.
Bottom line: spending drops, and that’s when the recession is obvious.
Govern yourself accordingly. We are only in the early innings of this mess (so I am not leveraging up on overpriced stocks; cash is king, for now).
See you next week.