Remember the LORD for it is he who gives you the ability to produce wealth and so confirms his covenant... Deut. 8:18

Friday, September 25, 2009

Oil Set To Slide. A Rising Market Feeds Itself

Stocks were far from the only assets feeling the jitters yesterday. Crude oil futures took a tumble too, sliding to below $66 a barrel. US inventories of pretty much all oil and petroleum products rose last week, according to the Energy Information Administration. This shows that “oil consumption is in no way recovering as well as the broader economic conditions are,” according to Sucden Financial Research analyst, Nimit Khamar.

This notion that broader economic conditions are recovering is an interesting one. Things might be getting ‘less bad’ but in truth, the only ‘indicator’ that’s really taking off is the stock market. Bulls often like to point out that the stock market doesn’t necessarily need the economy to be strong for it to put in a good performance, which is a fair point. But at the same time, investors tend to assume that a rising market means that the economy must be getting better.

As MoneyWeek regular, Pali International’s James Ferguson, points out in this week’s story: Just how long can this rally go on?, a rising market feeds off itself. People see the market going up, and they start to believe that it contains genuine information. After all, if the market’s efficient and the market’s always right, then if it’s rising, an economic recovery must be just around the corner. And if a recovery is just around the corner, you want to be buying stocks. So investors buy stocks, driving the market up even further.

Of course, then they see the market rocketing, and assume that this means the recovery is going to be even stronger than anyone expects. Which means you should be buying even more stocks. After all, who are you to question the market? But eventually the market reaches a point where it’s supremely vulnerable to disappointment, and investors start to expect some sort of genuine economic recovery. And when they’re disappointed, we’re likely to see all sort of assets take a tumble, stocks, oil, and even gold – at least in the short-term.

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