Taking $100 Oil in Stride

$100 oil is dominating the financial headlines.

Some analysts have warned $100 will stop the recovery in its tracks.

Others put the magic number between $120 and $130 per barrel.

There’s no way to know for sure. But if we go beyond the headlines and designed-to-predict-the-last-crisis macroeconomic models, we can quickly see the real impact of $100 oil.

A Different Perspective

Your editor has spent the last few days in central Mexico. We traveled from the middle of the troubled country across to the Baja of California in search of the next big gold, silver, and copper stories.

We’re still putting everything we learned together, but there’s one thing that was apparent shortly after getting home – the media is missing what $100 oil really means now.

The top headlines focused on the Middle East and oil when we left our climate-controlled confines for south of the border.

When we periodically plugged back into the world the top headlines were still on the Middle East and oil.

Now that we’re back the headlines continue to surround the Middle East and oil.

It almost seems to the point the financial media is doing what it does best, giving investors information they want to know instead of that which they should know.

Don’t get me wrong, the events unfolding in the Middle East will have lasting consequences. We’re not trying to downplay it. Throughout history leadership vacuums can and will produce good and bad outcomes.

But from an investment perspective, $100 oil and the global economic reaction to it is actually a very positive indicator.

Taking $100 Oil in Stride

Consumers are dealing with $100 oil just fine. While oil and gasoline prices have surged, consumers have largely taken it in stride.

The Federal Highway Administration has recently reported drivers are on pace to log three billion miles of over-the-road driving this year.

That’s just 0.7% below the 2007 peak and is on par with 2006 driving levels. Gasoline prices averaged less than $2.50 per gallon nationally at the time.

Pretty impressive, right? Well, it’s actually just one part of a much bigger picture coming into focus.

While we were on the road, the markets were handed numerous exceptionally positive economic reports.

For example, the Bureau of Economic Analysis reported real (after inflation) personal consumption spending has fully recovered from the recession. Total U.S. consumer demand is now higher than the 2007 peak before the recession started.

The Federal Reserve reported consumers’ balance sheets are improving too. Total credit card charge offs were at an annual rate of 4.2% last quarter. That’s better than 4.7% annual average over the last decade and sharp improvement from the early 2009 peak charge off rate of 6.7%.

The American Trucking Association (ATA) reported trucks are hauling more goods now than at the peak year in 2007 too. The ATA’s Truck Tonnage Index is now above 2007 highs. The index has fully recovered and it’s on the uptrend.

The lone holdout in the recovery has been employment. And with the monthly jobs numbers due out in a few hours, even shockingly positive growth numbers won’t put much of a dent in the unemployment rate.

The Sweet Spot

Economic growth while oil is well above $80 per barrel and stubbornly high unemployment continue to keep us market’s “sweet spot.”

Central banks around the world, led by the Fed, continue to signal they’re not going to shut off the free money spigot anytime soon.

Meanwhile, the underlying strength of the economy, which has only been further proven by continued growth despite triple digit oil prices, will keep demand for stocks and assets high.

The combination of both of these factors will likely keep the markets headed higher for the foreseeable future.

That’s why, although we’ve been anticipating a correction, we’re not going to wait for it to come and, if and when it does come, we’ll view it as an opportunity to buy more.

High oil prices and continued economic strength prove this recovery is a lot more real than most investors continue to believe it can and likely will eventually be.

By Andrew Mickey

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