It's been brought up extensively already. Even WSJ discussed it a few weeks ago.
What price of oil will make the stock market actually go down?
- Thread starter blackchip
- Start date
It's been brought up extensively already. Even WSJ discussed it a few weeks ago.
When the Crude-to-Gold ratio (Price of Crude Oil in Dollars Per Barrel) / (Price of Gold in Dollars per Troy Ounce) exceeds 1.25, the stock market will go down. That would mean the average American would be spending 50% of her income on gasoline. By "average American" I mean someone who drives an average car with average fuel efficiency, an average number of miles per year.
Today the average American drives 12,000 miles per year and has an average income of $50,000. At an average fuel economy of 20 miles per gallon, the average American consumes 600 gallons of gasoline per year. At $3.50 per gallon, the average American spends $2100 per year on gasoline (4.2% of her income).
However, if the price of gasoline rose by 12X, then gasoline would represent (12 x 4.2 = 50.4%) of the average American's income.
Today the Crude-to-Gold ratio equals (102.5 Dollars per barrel of crude / 984 Dollars per troy ounce of gold) = 0.104. Multiplying by 12, the "market will go down" ratio number is 1.25.
QED
Today the average American drives 12,000 miles per year and has an average income of $50,000. At an average fuel economy of 20 miles per gallon, the average American consumes 600 gallons of gasoline per year. At $3.50 per gallon, the average American spends $2100 per year on gasoline (4.2% of her income).
However, if the price of gasoline rose by 12X, then gasoline would represent (12 x 4.2 = 50.4%) of the average American's income.
Today the Crude-to-Gold ratio equals (102.5 Dollars per barrel of crude / 984 Dollars per troy ounce of gold) = 0.104. Multiplying by 12, the "market will go down" ratio number is 1.25.
QED
That would be WWIII with all the oil from Mideast gets stolen.
Quote from tradestrong:
Good points. I actually see the bottom for the dollar coming up soon. Exports increased by something like 4% last quarter. Additionally, with recessionary fears, I just don't see Americans spending money which is going to start reducing imports. This should help stabalize the dollar's free-fall.
Truth to be told, we have the worst of all worlds over the next quarter. We have a deflated dollar, a huge trade defecit, low interest rates (which cause capital flight) and the rising price of oil.
But the reality is that we really probably need to be in this position to realign the American economy. The good news is that we will hopefully get this "sick" economy the medicine it needs which has been put off for about a year now.
First, I believe that stabalizing the dollar is priority number one, hence the lowering of interest rates and decreasing imports. Once we get the dollar stabalized, then the fed can start raising interest rates again to try and attract the foreign investment back. With an improving dollar and deep discount securities, this could prove really attractive to those foreign investors.
To give a gross analogy, sometimes you just need to barf to get better and trying to hold it in only prolongs the sickness.
So contrary to what most people's opinions are, I think the lowering of interest rates are important even if they are painful at the same time.
The core of the issue is that the United States has a currency whos value is based on nothing but a pledge of production, yet is tied to an economy that is based consumption. Increasing the money supply and cutting interest rates will not resolve this issue. The resulting inflation will have an inverse effect to the perceived ability of corporations and individuals to pay back outstanding debts. Margin calls like we saw today with Thornburg will become the norm.
If the Federal Reverse keeps their current course there is no way that the problems in the credit markets can be contained to the sectors currently affected and the situation will get alot worse.
Well, I'm going to both agree and disagree with you. First, I'll agree that the value of the USD has to a great degree been based upon consumption, which is precisely why it is in a free-fall.
I'll disagree on the impact that cutting interest rates and increasing the money supply will have though. Yes, inflation is going to be a serious problem and the USD will continue to fall in the short-term and credit is going to choke consumers and corporations alike. In the short-term, things are going to get a lot worse. Inflation, the credit crunch and the devalued dollar are going to force consumers in the US into a virtual grid-lock
But in the longer-term, the balance of trade will reverse direction which should bring the trade deficit (at least closer) back into line. The US is still perceived as a safe place for international investors and I seriously don't see that changing in our life-times. This "political safety" still makes the US a very attractive place to invest money. The key is for the FED to not continue cutting interest rates one day too long once it is apparent that the BOT has reversed significantly. That will be the sign to start again raising interest rates. When that day comes, job growth should rebound and many new international companies will most likely take advantage of the cheap dollar and low interest rates to do their export business from.