Professor Elam

My weekly newspaper column!

As I write against the deadline Friday Morning Nov 14, oil is down and probably headed for $50.  It may over run that to forty something for a short time.

And that is precisely what happened. Oil dropped over three dollars December 4, basis January  futures, to close at $43.67.  Our best estimate is that it in fact will find support at or around the $40 level. We can cite some statistics as reasons for this level.   Forty Dollars was a significant  top in several times since 1990.  The US Dollar is looking toppy.   The currencies of Australia and Canada, both commodity producers, look like they are bottoming.   The Goldman Sachs Commodity Index GSCI on the CNBC ticker, is near its previous high at 4,000. But there are more important longer term issues at hand.

We gave considerable warning of all this last summer at $145 oil.  While no doubt there is much consternation in West Texas at the moment, consider the much longer term implications. Opportunities to enter an important market at the dead low are rare, take the opportunity to position yourself at this long term commodity price bottom.  Meanwhile, the US government is literally throwing money from airplanes, cranking up the Dollar printing presses, and issuing lots and lots of debt.  The short term results are surprising. There is more demand for the US Dollar as a lot of debt is denominated in dollars. Money has rushed headlong into US debt as a ‘safe haven.’ And so interest rates on the ten year note are the lowest since 1955.  Yet the money supply has never increased faster in less time than it has lately.

But like $1.59 gasoline, this will not last.  The FED will continue to flood the economy with money in an attempt to stem deflation. Deflation would be the collapse in commodity and housing prices.  Eventually prices will stop going down, as noted, we should be near a low in oil.   At some point however, as the US asks the world to buy a never ending fountain of debt, some will suspect the US will be repaying with very inflated dollars. At that point, the value of the dollar will begin  falling  very rapidly. Values of things denominated in dollars will rise very, very fast. Indeed, I suspect the rise above $100 in oil this past year was based on the belief that the US would simply not defend its own currency. The current rise in the dollar is not due to any intent to defend the dollar, indeed it is the inadvertent result of printing even more dollars.

But I digress. At some future point, we suspect there will literally be a run, as in away from, the US Dollar. At the end of World War II, the Arabs demanded gold bullion in payment for their oil.  We may well be headed that way again. At that point owning oil or coffee or gold or silver may be very preferable to owning a depreciating dollar.  It may well be that moving to another currency will be a superior strategy to staying in US dollars once the peak in the Dollar occurs. Such events have occurred in Germany and Argentina and seem alien to Americans.  But that day is coming.  I suspect that event (a Dollar peak signaling the start of decline) is no more than two to three years away. Prepare now, the day of dollar reckoning should occur before the New President’s first term is over.