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Tags: Oil | Stock | Market | Plunge

Pricey Oil Will Spark Next Big Stock Market Plunge

By    |   Monday, 27 February 2012 09:01 AM EST

In mid-2008, oil reached almost $150 a barrel and the response from the stock market was to dive from 14,000 on the Dow down to the 6,000s.

Oil crashed from almost $150 down to $33 a barrel as the global economy seized up.

Then back in April and May 2011, oil reached almost $115 a barrel before peaking out that time. The response from the Dow? A four-month correction that caused the Dow Jones Industrial Average to shed 2,000 points.

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Well, here we are again — approaching these lofty levels again in the price of oil. As of this writing, oil is around $110 a barrel.

Plus this time, we don’t just have the demand from the recovering global economy stoking the price of oil, but we additionally have Iran pushing the price even higher as they cut-off France and Britain from their oil exports and as they shun the nuclear weapons inspectors.

Europe had already said that it would stop using Iranian oil by June anyway. So Iran decided to go ahead and strike first so they could make it look like it was their idea.

The U.S., Europe and Israel are playing a very serious chess game against Iran. We all beat our chests and they respond back by beating theirs.

However, they are about to be at a point of desperation which will either make them cave in as they reach their “uncle” point or they’ll be like a hornet’s nest that got stirred and they’ll come out fighting.

As this chess game keeps being played out by each side making their corresponding moves, one thing is for sure — it all means that the price of oil is heading higher for now.

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Also, don’t forget that the summer driving/vacationing season is coming up too. This tends to bring the price of oil higher on its own.

Honestly, this is a tough fight that we’ve got on our hands.

On one hand, the Iranian economy is doing so poorly as a result of sanctions that their currency has lost half of its value within mere months. That could cause its own kind of Arab Spring and the internal friction could be enough to make it to where Iran can’t effectively fight other countries if they have so much inward fighting going on.

Then on the other hand, oil is going to hit the $115-$130 level within three months. When this happens, it runs the risk of bogging down the U.S. and global economy while shaving some serious points off of our stock market yet again.

I’m sure the Iranians are counting on that added pressure hindering Obama particularly as re-election time nears.

If the U.S. economy were to show signs that it was crashing again before the November election, then Obama doesn’t stand all that great of a chance of getting re-elected (which wouldn’t hurt my feelings…but would be rough for him).

So at the worst, we get a war with Iran or an economy that buckles again under rising oil costs. In the best case scenario, we likely have a sizable correction in the U.S. stock market and then a recovery.

But here’s the deal with that scenario. If the price of oil remains elevated, then growth will be sluggish at best which will in turn weigh upon stock prices.

So even the “best” scenario doesn’t look all that hot…but it certainly beats the worse scenario at least as far as the economy and stock market is concerned.

How can you protect yourself in the midst of all of this? Own “real assets” like commodities and foreign currencies.

In the worst case scenario, if stocks correct severely, you’d want to own defensive currencies like the Japanese yen or Swiss franc. Commodities like gold always make a prudent choice during those times too. Gold can experience some near-term sell-offs when financial markets correct but gold is quicker to bounce back than most assets afterward.

In the best case scenario, we end up having some sizable corrections but that don’t crash the market. In that scenario it becomes a trader’s market.

You own assets like oil, copper, silver, etc. with financial markets are on their way up and you own things like gold, the yen and franc when they are on their way down.

You see, even in the best case scenario, economic growth keeps the price of oil at elevated levels which acts like an ankle weight upon a runner for the economy.

It’s like a car that red line’s at 6,000 RPM. When you’re traveling at 2,000 RPM you’ve got plenty of gas pedal left before things get dangerous. But when you’re at 5,000 RPM, you don’t have too much more pedal you can use before you run the risk of blowing an engine as you approach the 6,000 red line mark.

Well, when the price of oil tops $110, we are at 5,000 RPM on our way to 6,000 RPMs very quickly. If we reach, $150 a barrel then nuts and bolts start falling off of the global growth machine right and left.

So we’re in a tricky period in history. Thankfully there’s a solution by owning “real assets.”

Own the real assets of oil, silver, copper, etc. when the economy is creeping upward and own the real assets of gold, the yen and franc when financial markets are correcting sharply lower.

In either scenario, these “real assets” are the way to go. I hope this has given you a roadmap to go by as I’ve shown you what lies ahead.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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Monday, 27 February 2012 09:01 AM
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