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David Rosenberg: Why Rising Commodity and Oil Prices are Actually Deflationary

by Brett on February 25, 2011

Interesting take on why rising commodity prices ultimately have a deflationary effect – from David Rosenberg in yesterday’s Breakfast With Dave:

The bond market is telling you something very important here that rather than being a permanent source of inflation, what we are witnessing is a global exogenous deflationary shock (the impact on discretionary spending in America will be considerable — consumers use 140 billion gallons of gasoline annually and prices are already up 30 cents so far this year and the run-up is far from over).

So the bottom line is that there is still more near-term upside potential than downside risk for the oil price (and most energy stocks). This then will act as a tax on consumers and as a margin squeeze for non-oil producers and only when global demand sputters, as it did in the summer of 2008, will the oil price break.  Never before has the monarchy faced such a protest — the nation itself has a population of 500,000, so 20% showed up for the protest.

What makes Libya different from a market’s perspective is that we are now talking about an oil exporter in the sudden grips of political upheaval down — although it is likely to settle in a new and semi-permanently higher range as it did coming out of the global credit collapse.

I believe we are getting closer to the point where the surge in oil prices could tip the global economy back into recession (we may have already reached that point anyway). My reading of Wall Street research shows that the trigger point for recession calls would be somewhere around $120 a barrel. As it stands, both the move in the oil price on a two-year basis and the current level in real terms suggest that the “odds” based on past performance would certainly be better than 50-50 as it pertains to the U.S. economy in any event.  We must also look at what is happening from the lens of soaring food costs as only three times in the past four decades have we confronted a double-digit runup in both food and fuel prices at the same time. Good news for gas stations and maybe food stores but not for other retailers.

Source: Breakfast With Dave

Remember that back in 2008, skyrocketing food and oil prices (which peaked between March and June ‘08) immediately gave way to the most extreme deflationary wave we’ve seen since the 1930’s (and perhaps ever in such a short period of time).

Could we see something similar this time around?  Perhaps – but it may be a bit early, as food and oil have not yet (by and large) exceeded their 2008 highs.  Plus we’ve still got QE pumping through our monetary veins.


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