Wednesday, March 18, 2009

What happened to Deflation?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The CPI for February was out this morning and it was up 0.4%. Producer prices were up yesterday as well. Both were up in January too. Where did the deflation go that the mainstream media was warning us about over and over and over again at the end of last year and the beginning of this year? It seems to have been chased back to whatever part of Fantasy Land it came from by rising oil prices. The CPI report this morning did indeed indicate that two-thirds of the price increase was caused by more expensive gasoline.

While the official government inflation figures (not actual inflation, never confuse the two) were hoovering around zero levels at the end of last year, this blog pointed out that it was due to falling oil prices. Core inflation, which excludes food and energy, never got anywhere near zero. It was also clear to us that oil prices couldn't fall much further because they were too close to production costs and the next move would have to be up. While light sweet crude double bottomed in December and February, gasoline prices bottomed in December and have been going up since then. U.S. gasoline demand actually went up at least three weeks in a row recently. This is happening even though there is a severe recession (really depression) and demand is supposed to be dropping sharply or at least the media constantly tells us this. Since it isn't, this indicates prices have become too depressed and need to go up.

Oil has indeed moved up nicely since it February 18th low in the high 33's. The NYMEX contract closed at $49.16 yesterday. There is resistance just above $50.00, so prices should get stuck at that level before they can break higher. Surmounting this level will confirm that oil put in a double bottom at 33. Our oil tracking stock DXO had a significant breakout by closing at 2.71, 20 cents above its 50-day moving average. DXO actually traded above its 50-day five out of the six previous trading days, but couldn't close above it. Finally, the bulls gathered enough muscle to push it over. You should expect this line to be tested in the future.

Oil is in its seasonally strong period and should be bullish until at least June and possibly into the summer. The move is not going to be straight up however. Expect lots of volatility along the way. The weekly storage reports from Cushing, Oklahoma (one is due out today) can always cause sudden moves up and down.

NEXT: Invest Now for the Coming Inflation

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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