Oil: Up or Down

by JDH on September 16, 2023

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.

Inflation will hit zero by Christmas

by JDH on September 9, 2023

How’s that for a clickbait title?

Everyone is worried about inflation.  They say that unemployment remains low, so employers must pay more to retain workers, so wages go up, and that’s inflationary.

That was the story in 2021 and 2022, but that’s not the story today.

With the reduction of direct fiscal stimulus (CERB and other payments directly to working-age Canadians and Americans) more workers are entering the workforce.  The Labor Force Participation rate has increased.  That will contain wage growth.

Interest rates are at the highest levels since 2008.  That constrains spending.  The real estate market is in a slow-motion crash (that will become a fast crash later this year and into 2024).

But wait, CPI is still higher than the Feds 2% target!

Yes, but there is a lag effect.  If you signed your lease a year or two ago when rental supply was constrained, and rents were higher, you are paying a high base rate of rent.  But those rent gains are diminishing, and as leases renew, and people move, the impact of higher rents diminishes.

And then there is A.I.. Artificial Intelligence improves productivity, and that is clearly deflationary.

So, don’t believe the inflationists.  Inflation is going in the other direction.

Check back at Christmas, and we’ll see if I was right.



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Proof that Inflation is Collapsing

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The Craziest Yield Curve Ever

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