The Chicken Or The Egg

Oil continues to dominate the headlines, as recent price spikes followed by a $10.00 per barrel decline from its high, reignite discussion about fundamentals. Having witnessed the significant decline in automobile traffic at the Jersey Shore firsthand over the Memorial Day weekend, it is quite evident consumers are cutting back. Traffic on the corridor from Philadelphia to Atlantic City was subdued and nowhere near the usual holiday volume.

Meanwhile, the stock market seems to be trading in a range between 12,200 and 12,800 with no compelling reason to break from this range. With the verdict on recession inconclusive at best, politicians are scrambling to use any definition, even a revised 0.9% growth rate in GDP for the first quarter, as a way to save face. Most major candidates have already come out and pronounced the economy in recession, when in fact, we are not even close to delivering two full quarters of negative growth. It just amazes me how loosely the true definition of recession is contorted for political purposes. While there is no doubt that the current rate of GDP growth causes pain, the economy was NOT in recession during the first quarter of 2008.

Inflation pressures, due to the dramatic rise in the price of crude oil are now being felt throughout the economy. The Fed can't lower interest rates any further, because it makes the dollar less attractive as a currency. This in turn causes the price of oil to rise as investors seek crude oil as a hedge against the debased dollar. The drop in the value of the dollar, coupled with the rise in the price of crude, which permeates every facet of our economy, creates an expectation of higher prices, which is the very definition of inflation. The only way to break this cycle is an economic slowdown or raising interest rates. The question is which will come first, the chicken or the egg?

John Kaighn

Jersey Benefit Advisors

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