ECONOMIC UPDATE FOR THURSDAY FEB 24th 2011

Haven’t done one of these in ages, but the changes are coming fast and I thought it deserved its own post.  I used to do this almost daily as the economic collapse gained strength in the summer of 2008. The hits came so fast and furious, that it was almost impossible to keep up with it all. We are approaching the same break neck speed in events that we reached in the summer of 2008.

DOW and EQUITIES MARKETS

For 2 days we’ve seen a pretty sustained sell off in the equities markets. This is peanuts compared to the nearly yearlong and prolonged gains they have seen, but I think it deserves to be watched. The DOW reached a post crash high of nearly 12400 at the close last Friday. We have since lost nearly 250 points and are one more triple digit close from breaking back under 12K. This is significant because markets do follow some semblance of order and certain levels are psychologically important. When the markets broke through 12K for the first time since the collapse, it fed upon itself and quickly rose to over 12,400. If we break below 12K, I can see us quickly re-tracing back to the 11,400 level which is the next level of resistance on the downside in my estimation.

Markets are poised to rebound at the moment (11:30pm Wednesday) as futures are pointing to a moderate gain. But at this point last night the futures were pointing to a large gain at the open that quickly dissipated and ended with a 103 point drop at the close. Again this is a SMALL LOSS in comparison to the gains; it amounts to a less than 1% loss on the day and a cumulative 2.1% loss in 2 days. This is a far cry from the 3 or 4 or even 6% losses we were seeing at the worst of the 2008 collapse. But the fear is back, and once the bull fever subsides, we could see it replaced with a long and sustained return to the bottom I’ve long called for, but have yet to see. If you remember in 2007 I had given a series of predictions that would see the market re-trace its 2001 collapse and break through to the 5200 level on the DOW. The collapse followed very closely the levels I was looking at (remember the 8702 level?? That was almost funny as it danced at that number for weeks). But just as the bottom was forming and a further fall was set to happen(from the bottom at 6667 on the DOW), the Fed and the US Treasury stepped in to stop the inevitable deflationary collapse that was set to burn this economy down to the ground.

We will eventually retrace those numbers; and I believe that it has already started. I do not expect us to top the 12400 level again, but I could be wrong. If there is a quick and painless resolution to the Middle East problems and Saudi Arabia is able to quell any internal strife, then the Bulls might stage a comeback. But I think all forward momentum on the markets is lost and a return to the old trend line is at hand. I expect a few days of moderate to possibly strong gains going into the weekend. Probably pulling back to within striking distance of 12400; but that is likely to be the end.

COMMODITIES:

This will anger a lot of people here, but I am sticking to my long held position that gold and silver are going to go through one more sustained period of collapse. Not saying to sell, JUST BE MENTALLY PREPARED FOR IT. Just try and keep some powder dry so that you can swoop in and buy up some lower priced silver (my preference) and gold.

But even as I write this Silver has jumped over 33 an ounce and Gold is falling slightly to the 1408 level (give or take). But it is the other commodities that I am watching. With oil finally catching up with the long term trend line, it is going to do to the economy what it did in 2006/2007, only it will happen MUCH quicker and much more violently. I do not think we see 110 dollar oil or 4.50 gasoline this time around. I think we are very near the level where it will choke off economic growth (what little there was), and it will set in motion another (and possibly FINAL?) deflationary spiral that will send all commodities/equities/home prices into the sewer. It will be accompanied by another massive round of layoffs at the public sector and small business level. Be prepared to benefit from collapsing prices as this is likely to be the last go around of this merry-go-round.

After the deflationary collapse, prices will likely move from collapsed to high to possibly unaffordable in a very short time frame(like less than 12 months). Just keep watching and waiting. Do not sell unless you have to cover something of greater importance on the way down, but rather save up some money to buy silver at a greatly reduced amount. I think 17 is a good number to look for, but possibly only as low as 21 or 22. I am not rich enough to afford Gold, so I will withhold any comment.

OIL PRICES:

WTI prices finally whipsawed back in line with Brent Crude. Was this really a surprise to anyone? Really? Brent has been selling at a nearly 12 dollar premium to WTI and it was explained by any number of ridiculous mainstream reasons. Sometimes the obvious answer is the right one and that is WTI was being manipulated down for political reasons. WTI corrected nearly 10 dollars in 48 hours shaving billions off of GDP in that amount of time. And that number will continue every single day that oil prices stay at these levels.

Oil prices are the lynch pin to everything at this point and should be watched CLOSELY. And I mean this literally. If you have an APP on your smart phone, I would have it track WTI and BRENT by the minute over the coming days and weeks. Before CNN, before FOXNEWS or any other news show tells you that there has been an uprising in Saudi Arabia or some other large producing nation, the markets will react violently like they did this week. We could see a 10 or 15 dollar spike on just a RUMOR of problems in Saudi Arabia.

The price of oil is already causing gasoline prices to spike towards the upper 3 dollar a gallon range and is already past 4 dollars in some California markets(due to higher taxes). 4 dollars is the line which we cannot cross in the United States. It is not just purely psychological either. At 4 dollars a gallon a person making Min Wage mine as well stay home as the fuel costs (and the rising costs of food and the rest) will make working almost a negative. At 4 dollars it costs the average middle class SUV driver close to 65 to 75 dollars to fill the vehicle. Combined with rising costs for home heating and electricity, it will quickly sap any spare money they were using to go out to eat or to buy whatever small amount of luxuries they were just starting to venture out and buy.

The same confluence of events is replaying that played from Late 2006 to early 2008(the spiking of basic prices like energy and food). Only this time it will complete in months not years. There is no more slack in the system and anything that drains liquidity from the consumer is going to be immediately felt as companies and service providers do not have access to deep wells of credit like they did from 2006 to 2008. They are living on the razors edge.

CONCLUSION:

We are entering a period of chaos again and it will likely get much worse. But remember that things do not go up in a straight line and neither will it go down in a straight line. We are bouncing along the bumpy plateau of Peak Oil. We wondered in 2005/06 what it might look like and to be honest it is not nearly as bad as I thought it would be. Granted we are only in the opening stages and it is likely to get much worse. But from the vantage point of 2006, I thought 2011 would be the year that it was entering the final stages of economic collapse.. We have not even completed the opening stages yet.

Robert

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