I have another pet theory that has to do with the rising price of oil causing a recession.
From my April 15th post... [noting like quoting yourself as a source, huh?]
**********Perhaps I should discuss my theories regarding the pending collapse of North America's economies. You know... sky rocketing oil prices driving the cost of transportation so high that our national infrastructure grinds to a screeching halt; the eventual rise in interest rates that will result in foreclosures and bankruptcies everywhere (thanks to the big banks love affair with allowing families to leverage themselves to the last dime); all wrapped up in a blanket of super-debt that our neighbours to the south seem to think is somehow propping up the rest of the world.
A little melodramatic... but I'm sure you get the point.
Here are some selected para's from an article in today's Globe:
**********Energy prices bear down on retailers Although North American retailers have managed to dodge the full wrath of soaring energy prices so far, there are mounting signs that the game is nearly up.
The latest batch of economic reports suggest that the seemingly endless rise in crude, gas and heating oil prices is finally having an impact on how much consumers are willing to spend. With consumer spending waning during the most important shopping season of the year, most equity strategists agree that investors should steer clear of retail stocks.
"Consumer spending held up early this year despite the rise in gas prices, but there has to be a breaking point," said Ken Perkins, president of RetailMetrics. "I think we are finally approaching that point."
The price of oil surged to a record high $70.85 (U.S.) a barrel in August as hurricane Katrina hit the U.S. Gulf Coast. Crude has risen 35 per cent in the past year. Gasoline and heating oil futures are more than 50 per cent higher year over year while natural gas prices have spiked to records of more than $14 per million British thermal units, more than double from a year ago.Desjardins Securities analyst Keith Howlett estimates that at current prices, the combined pain of higher gasoline prices, home heating costs and electricity charges will take an additional $6-billion (Canadian) out of consumers' pockets. That is "significant" when one considers that Canadians spend about $240-billion at retail outlets"If we eliminate that factor, people are going to look at their net worth and discover that energy prices matter. And then you will get a change in strategy in terms of how a consumer will spend, and allocate their dollars."
It's been a while since I've had to walk anyone through a meaningful economic analysis, so I'm not going to try. But how's this for a simple logic chain...
- Oil and gas prices rise.
- Consumers have less money to spend on retail purchases, so they purchase less.
- When retail sales fall, jobs are lost.
- When jobs are lost,there's less money to spend on retail purchases.
- And so on, and so on, and so on.
An over-simplification to say the least, but the logic works. But let's get a little funky and add in the role of central banks and interest rates.
Interest rates remain at an all time low. But all the signs are in place for central banks to start raising rates slowly over time. We're an overly-leveraged economy. What happens when interest rates creep up? When the prime rate goes up, so do mortgage rates. Folks on fixed rates are protected in the short-term, but not forever. Folks on variable rates are impacted, but they don't actually 'feel' the impact until it's time to renegotiate their mortgage - that's crunch time. Ultimately, higher mortgage rates means less ability to afford homes. Couple that with job losses from retail environments and I think you have a formula for increased bankruptcy and foreclosure rates.
Consider also the folks who are so leveraged that they live paycheque to paycheque. It's more than theoretically possible that a marginal increase in oil and gas prices will put them beyond their ability to service their personal debt loads. When this happens... bankruptcies and foreclosures.
Let's add in one more layer to the mix - investors. Investors put their money in places that make them money. If retail sales are falling, retailers are (presumably) making less profit. That means less incentive for investors to keep their money in retail-related investments. Pulling out investments may (under the right circumstances) have a multiplier effect on the difficulties already being faced by the retailers due to decreased sales.
As consumers, we end up spending more $$ on less goods. Average standard of living decreases... etc., etc.
I started talking about this with friends and colleagues about 18 months ago. It was my hypothesis at the time that we would enter a major, global recession within 5 years. The catalyst would be rising oil and gas prices. 3.5 years to go in my prediction... oil and gas prices are significantly increased over where they were... the warning signs are starting to build.
Anyone want to guess the outcome?