Of all the crazy market action in the 2007-09 housing meltdown and Great Recession, you know what stands out the most? The fact crude oil prices rocketed to all-time highs.
Between January 2007 and July 2008, crude oil prices almost tripled from $51 a barrel to $147 a barrel. This happened even though the stock market was plunging … the housing market was imploding … banks and brokers were tumbling toward failure … and the global economy was slipping into its worst recession in decades.
Why would that happen? How did that make any sense from a rational standpoint? Well, consider what happened to the U.S. DOLLAR during that same time.
The DXY, or U.S. Dollar Index, tracks the performance of the greenback against a basket of six foreign currencies. The euro has the highest weight at just under 58%, followed by the Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
As you can see in this chart, the DXY started falling off the table at the beginning of 2007. It ultimately tanked from around 85.50 to 71.40. That was the lowest level for the DXY since it was created in 1973.
Sure enough, the move in crude oil is a veritable mirror image. It’s worth noting that other “contra-dollar investments” like gold also took off like a rocket. The yellow metal jumped in price by around $400 an ounce to more than $1,000 an ounce.
That brings me to today. We’ve just seen the failure of the Doha production talks. Iran is jacking up production, threatening a Saudi response. The U.S. is still churning out millions of barrels per day more oil than it did a few years ago (though down from the peak). The latest data suggests the U.S. economy is stumbling badly.
Yet oil just rallied more than 60% off its low in the mid-$20s. And perhaps not coincidentally, the DXY has been wilting right alongside — falling from around 100 in December to 94 this week. It now sits on the edge of a potentially serious breakdown, with some currencies like the Japanese yen really on fire against the buck.
Now I’m not saying the dollar and crude have to move in lockstep again. But it’s worth noting that gold is on fire this year, surging just like it did back in 2007-08. And even though some pundits on Wall Street might tell you otherwise, I don’t think a surge in crude would be bullish for stocks overall.
It sure wasn’t last time, as you know. Stocks imploded in 2007 and 2008. The surge in oil also helped push a struggling U.S. economy even deeper into recession by driving the cost of things like gasoline through the roof.
So if I had to sum up my thoughts, I’d put them this way:
- The dollar looks increasingly vulnerable here. I’ve been long the Japanese yen, and one of my other favorite “safety” currencies, in a couple of my services. They could really explode in value if the dollar falls off the table.
So watch the critical 93 level on DXY to see if that technical support gives way. In the meantime, click here if you want to know what to buy and why in an era of weaker U.S. growth and a major credit market turn.
- Crude could jump if that happens. But if it does so because of the dollar tanking … and the dollar is tanking because the U.S. economy is tumbling toward recession … that sure doesn’t sound like a recipe for higher stock prices.
The only companies that would likely prosper would be my safe yielding, lower-volatility, less economically sensitive gems. Again, you can click here to watch “The Unseen Hand” — and find out how to get specific recommendations.
- One of the best plays would be gold and gold miners. You don’t get the high level of economic/recession risk that oil comes with. But you do get protection against a plunge in the buck, insane monetary policy worldwide, and a blow out in risk spreads or stock market decline.
If you’re looking for more specific suggestions not just from me, but from a trio of noted gold experts, whom I’ve been working closely with — then consider the Money, Metals, & Mining Cruise. It’s scheduled to sail July 10-17, 2016, on board the Crystal Serenity from Anchorage to Vancouver. You can find out more information here, or by calling 800-797-9519 and asking for the special cruise rates that apply.
Bottom line: It’s a mad world out there. But clues to today’s market moves may be found from thelast major market and economic bust.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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