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Minyan Mailbag: Does Higher Crude Hurt or Help?

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Toddo,

Minyanville prides itself on being ahead of the curve and has the track record to prove that it is.

I bring this up in relation to a question I have about oil.

Way back when, when oil traded at 60, and the press was nervous and lightly hysterical, I distinctly remember you and the other professors demonstrating the positive correlation between rising oil and stock prices. Minyanville was ahead of the masses' reasoning in this regard. I believe it took the press another year or maybe even two to put three and three together.

Now the price of oil is hovering around 110, and everybody has become comfortable with A) high oil prices will not hurt the economy and B) a positive correlation with the stock market. But at some time there has to be a tipping point, right or wrong? If so, what do you believe it is? Am I worrying at exactly the wrong time as a deflationary spiral is soon to hit?

Regards,
Minyan Mike H


Minyan Mike,

This is a topic that we've discussed for a few years in Minyanville when the mainstream media was resolute in its belief that higher crude was a drag on the economy. It was (and remains) my view that the rising tide of liquidity, coupled with the constant grind of the greenback (-40% since 2002), was and is responsible for the upside asset class dance.

I remember doing an interview in October and offering that precipitously lower--not higher--crude prices were more problematic for equities through the lens of asset class deflation vs. dollar devaluation. It wasn't the first time a woman laughed in my face but it was the first time it happened during a business interview.

There's no denying inflation in things we need to feed, power and educate the world. It's largely responsible for the eradication of the middle class and the chasm between the have's and have not's. The Wall Street Journal ran a front page feature today on the decade high price levels and the attendant acrimony (which dovetails into one of our Ten Themes for 2008).

So, yes, it's a problem although I don't profess to know the tipping point. And so it's said, it's still our collective belief that the devil we see (inflation) will ultimately bow to the devil we don't. What's unclear is whether we need to hyper-inflate before we edge into disinflation, kiss Goldilocks on the cheek and eventually dance with the Phantom.

The fact that equities haven't enjoyed "commodity style" gains over the last six months is perhaps the most problematic element of the current equation. And this, of course, has occurred despite Herculean intervention efforts and sexy sirens of further fixes (such as the "mortgage trust" we've bandied about).

But alas, I'm rambling. So to your point...

It remains my humble opinion that equities will be more--or should I say, suddenly--vulnerable when crude (commodities) precipitously drips down the slippery slope. That, my brother, is what deflation will look like. Higher dollar, lower "everything else." The only people that win in that scenario are savers and those with little or no debt.

That's why we've been harping on capital preservation, debt reduction and financial intelligence, particularly during rallies. By the time you're reading about the dreaded "D" word in the Journal, the market will have already baked it into a sullen souffle cake.

Hope this helps.

Toddo

R.P.

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