Things are really starting to get interesting as civil unrest is having real effects on various markets. Oil is testing $100, gold is near its all-time highs, and stocks are selling off. Gadhafi has opened fire on his own people, which to me indicates that his grip on power is eroding. It appears this is just the tip of the iceberg for the Middle East; if Saudi Arabia falls, then we’ll really see some shocks in the oil market.
I will never make the mistake of assuming the world follows a linear path. I have always said that the major risks are to the downside, whether it be civil unrest, war, or a bond default. We live in a dynamic world that people just don’t understand. One second the world seems to be at ease, the next second civil unrest breaks out all over the Middle East and Africa. One second stocks can’t possibly go down, the next second stocks retrace weeks of gains in 2 days. One second gold is a “barbaric relic”, the next second people are buying at any price. This is just the way the world works. Understand that when U.S. government bonds suffer systematic failure, it will seemingly come out of nowhere.
It was only a week ago that the mainstream was saying that people were fleeing gold because of an economic recovery. Oh how quickly they change their tunes. Gold is still in a bull market. No matter what the pundits say, the price action in gold is far from bubble-like.
Gold is hovering above its moving averages and is close to testing its all time highs at $1430. I will be watching this level very closely. On a breakout I will be a buyer. Some people may wonder why I just don’t buy now instead of waiting. My thought process is that a breakout from long-term resistance is very bullish and implies much higher prices. However, a failure to break out above $1430 could portend considerable weakness. Buying a breakout is a higher probability trade. I may lose out on some gains, but I also protect myself from more substantial losses.
Events in the Middle East may have been the catalyst, but stocks were long overdue for a correction. I’ve always felt that stocks needed to correct a good 10-20% before resuming their bull market. A 10% correction would bring us to about the 1st retracement level from the July lows. If stocks were to fall this low, I would be very tempted to add. While dividend yields are not as attractive relative to bonds as they were last year, a healthy correction will turn the tides in favor of stocks.
Crude oil was trending upward steadily until the recent events in the Middle East. $100 is the key level here. If it can hold as support, then the outlook for oil will be very bullish. Let’s not forget how $100+ oil will affect Americans at the gas pump. I personally think $4 gas nationwide is coming again this summer. Discretionary spending is going to take a big hit as will GDP growth.
We live in a very interconnected world. The effects of policies in the U.S. are felt abroad and vice versa. If instability persists in the Middle East, Americans will feel it at the gas pump. This will only fan the flames of growing civil unrest in the U.S. When protests really start picking up in America, you won’t be hearing nonsense about America’s “fight for democracy.” This explanation of events in the Arab world is somewhat baffling. The U.S. has had its hand in Middle Eastern and Arab politics for a long time, and for Obama to get behind the move towards democracy (or military dictatorship if you want to get technical) in Egypt is something out of the Twilight Zone. People need to realize that the unfolding events are mostly about economics.
Baby Boomers have not saved for retirement. Home prices (aka piggy banks for Boomers) are falling. Taxes are rising. Pensions are underfunded. Social Security payment increases are linked to the manipulated CPI, so Boomers are getting screwed and they know it. Younger generations of Americans are perturbed that they have to pay for the profligacy of prior generations. The government has its head in the sand and their solution to this debt crisis is to get into more debt. Pure genius!
There will be civil unrest in America that will make what’s happening in Wisconsin look minor in comparison. Municipalities will start going bust and you will hear the word “bankruptcy” a lot. Gold is going to make $100 moves in a day. U.S. government bonds will be as safe as AAA-rated mortgage-backed securities were. Most of the population will be shocked as they always are when things outside their narrow perspective of the world occurs. The world is going to be a much different place in the next 5-10 years. Out of the pain will come renewed awareness and economic prosperity, but we must first pay the piper. That day is approaching very quickly.