Saturday, July 21, 2007

Why the price of oil will come down

I use the Pa Kettle system of looking at the economy. That is to say I don’t over analyze it. For instance: The Fed keeps printing new money and banks keep lending it. How far can it go?

Joe Sixpack borrows and borrows until he owes as much as he makes each month. You can call this ‘Debt Saturation’ (or the inability to service his loans). That’s fancy talk for – he can no longer cover the interest payments. That in a nutshell is as far as the debt bubble goes.

I saw a blurb on the news yesterday that mentioned ebay’s profit rose 50% on soaring online auctions in the U.S. Reading between the lines here, it looks like Joe Sixpack has not only hit his debt limit but is now selling the family jewels, jet skis, motor homes and what have you.

An earlier study showed that Joe was paying his credit card bill before his 0-down sub-prime mortgage payment. Why you ask? He has no skin in that game, ‘0-down’ don’t ya know. Saving his credit card rating is a bigger priority for him. Now it seems saving his skin is the priority.

This brings me to another Pa Kettle projection: The price of oil will drop next year by quite a lot. I’ll say down to between $40. - $50. per barrel. Why, you ask? Lack of customers.

I’ll explain. China with its’ growing industrial demand for oil is the workshop of the world. India with its’ own growing demand is the service department to the world. And America is the consumer and retail customer to the world. The mortgage equity withdrawal party in America is over. Not only is America not buying, but Joe Sixpack is selling all those goodies he bought just last year.

If Joe’s not buying, China is not getting orders to produce. India is not getting orders to service. Chindia’s growing economic middle class will start facing layoffs. Factories will scale back and both industrial and personal demand for oil will weaken.

In the U.S. if Joe gets laid off due to a faltering economy, he will have to cut back on his personal fuel consumption. If demand for oil weakens so will the price.

Vern, A.K.A. Pa Kettle

Boston's Crumbling Economy
Yesterday afternoon, with the Dow pushing 14,000, I decided to take the afternoon off and go out and document what I’ve been seeing with my camera. You’d think that with stock markets pushing all time highs that the economy would be booming. But as many observers have amply noted, fundamentals don’t
back up the strength in the financial markets.

Citing fundamentals, Mish issued a market-top call last week.
Yesterday Robert Prechter, in a special note to subscribers, issued a warning as well. In his report, he notes that breadth during the latest rally has been weak, and advised, “Aggressive speculators should return to a fully leveraged short position now…” In other words, the end of this rally is nigh.
(You can read the report as well as three months of back issues during EWI’s special free week, until July 25).

Below are the pictures I took, investigating the “fundamentals” of my local economy. All of these pictures (aside from the last one) were taken on a stretch of road that I travel regularly, and would estimate to be about 2-1/2 to 3 miles long. Consumers may make up 70% of the economy, but they need jobs from business in order to keep spending. Businesses need places to do business, and this excess capacity shows that something is wrong with the real economy in Boston.


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