Wednesday, October 04, 2006

Positive double-whammy effect of falling energy prices

I'm not surprised at the actual decline in energy commodities, but it is nonetheless a welcome and pleasant process. The really good news is that we will experience a positive double-whammy effect from falling energy prices: the removal of an inflationary pressure and the addition of a stimulus to consumer spending.

The Fed is going to come out smelling like a rose on this one, with disinflation over the coming months coupled with sustained consumer spending even in the face of a moderating housing market. This will be quite a Goldilocks economy over the coming year.

Meanwhile, way too many people, especially "The Bears" and "The Bond Bulls" will get caught leaning way too short on stocks and way too long on bonds and betting way too heavily that interest rates are going to decline next year.

Two big unanswered questions for the coming year are: 1) where will the commodities bulls put their money now that the commodities bull market is "broken", and 2) where will hedge funds deploy their capital now that most of their pet strategies are rapidly crumbling into mediocrity.

-- Jack Krupansky


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