Nothing could have possibly stunned the street any more than a call by Goldman Sachs for $150 to $200 a barrel oil within the next two years.  The bank suggested that strong demand and weakening supplies would be reason enough to send prices upward, no doubt about that.

The problem with high oil prices is that it will affect US businesses more than other countries.  Since 2003, the US dollar has lost 50% of its value against the Euro.  Even with rising oil prices in dollars, the rest of the world is still able to buy cheap oil, largely because of a cheap dollar.  This increases the price for oil in dollars but for the rest of the world, particularly the Eurozone, prices stay moderate.  What is $120 in USD is 80 Euros, not much of a change from a few years ago.

Wall Street was a bit uneasy about the $200 prediction but was very quick to waive it off.  The Dow started in the red early but rose to close up 50 points.  While the market was unaffected by oil prices today, the premise of $200 should start frightening some investors.

Automakers and airlines have the most to lose or gain from oil prices.   GM and Ford, two struggling US automakers, have been losing more money on their top lines because of MPG ratings.  Gm once had a very profitable SUV wing that has since fell to the wayside as oil prices rose.  Airlines have it equally tough, the passenger airline business has very few opportunities to profit.  Small profit margins and greater expenses due to security measures make the cost of oil very important.  Though some airlines remained hedged, the price of oil will eventually come to terms with the profitability of the airline sector.

Now that a new bar has been set, look for traders to complete it.  Though oil seems to be stuck at $120 in recent weeks, a tightening supply this fall might push oil prices even higher.  Last hurricane season sent oil prices sky-high as refineries were taken off the pipes and shipments slowed.

The worries of the housing sector are starting to show overseas.  Today the Bank of England announced a package very similar to the Federal Reserve’s action to swap treasuries for mortgage debt.  The BoE acted to fund up to $100 Billion of government bonds for trade with mortgage backed securities.  This comes just weeks after Northern Rock was absorbed by the English government and the Federal Reserve’s actions for swap plan.

The Bank of England has been resetting rates alongside the Federal Reserve.  Since December, the Bank of England has lowered rates 3 times in an effort to spur borrowing and cut into liquidity problems that are plaguing banks and borrowers alike.  The Federal Reserve offered $200 Billion in guaranteed loans which is double the amount the BoE is currently offering, though there are many more houses and thus owners who are upside-down on loans in the US than in the UK.

This is comparatively good news for the United States.  As we’ve seen in recent weeks, the stock market has rallied on comparative news, that the market has gotten better though still doing worse than the long term average.  While we’re much better off now than in late 2007, many lenders are still writing off huge amounts of debt and assuming large losses.

It is hard to say how this will affect things in the UK.  The Pound has favored well against the other currencies, trading at nearly twice the value of the USD but losing much of its value to the Euro.  Investors who sought protection from a fallout in the US markets fled to Europe, many into the Eurozone and a few into the UK.  If housing problems persist in England, the chance of a drop in the value of the GBP becomes even more likely.

A quick fix of $100 Billion will help English lenders, but at the cost of inflation.  US consumers have already seen the cost of high inflation on the price of commodities such as food and oil but also on consumer goods which require more and more money to ship and produce.  The new funds will be made available to banks who want to temporarily “loan” the government their bad loans while using the new funds for further investment or to ease negative liquidity.

The merger between Delta and Northwest will create the largest airline in the world.  Both companies are struggling financially and through a steady loss of customers and government security, but will the two companies be allowed to merge and create one large, super airline?

Much evidence suggests that the company will not be able to merge just because of the sheer size of the two companies.  If the merger were to go through, it would be like Pepsi and Coca-Cola merging only to leave the small independent soda makers to try to fight through a monopoly.  I doubt very seriously that the companies will be able to turn a profit even when working together, neither of them suffers severely from competition.

Other than the banking industry, no other industry besides airlines has seen this much consolidation.  After 9/11, new security measures and a scared public has sent people away from airlines and back to ground transportation.  High fuel costs disproportionally hit airlines which only make a few hundred dollars each flight from passengers, the majority of their income comes from extra services and mail carrying.

I see little to gain from a merger between these two mega giants other than less pilots with a job and higher ticket prices.  There will be little regional competition on other airliners as these two control much of the domestic flights in the United States.  At this rate, I don’t think this merger stands a chance with the monopoly regulations in place.

Oil prices are soaring and its affecting every business.  Food prices are out of control as much of the worlds food supply is now being used to produce ethanol, rather than to food the world.  Energy prices affect the cot of nearly every commodity because it must first be shipped to market to be sold.

Many companies including UPS are now restating their earnings reports and forecasts to adjust for higher oil prices.  For a parcel service such as UPS, energy is one of the biggest expenses for shipping goods.  Corporations like UPS and Fedex will continue to get battered as the price of oil goes up.

Their main competitor, US Postal Service which is state owned, can be subsidized by tax dollars to keep the price low.  While the Federal government has always sought to run the postal service at a nominal profit, the losses continue to pile up.  Unlike Fedex and UPS, the postal service can subsidize fuel costs and keep prices low.  If fuel prices continue to rise, shipment through the two independents will be considerably more than USPS which can keep costs low by using tax dollars.

Airlines are also losing heavily on the higher oil prices.  Airline ticket prices have skyrocketed after September 11th and new security measures.  Now with high oil prices, the airlines must again raise ticket prices.  Loyal customers hate to see rate increases and the security and pricing troubles are certainly weighing down the whole industry.

The price of oil can affect nearly everything we buy.  Every item at the store will go up in price as oil costs rise, airline tickets are rising, and so is the cost to send a package cross country.  In this day and age its impossible for even the non-driver to avoid high oil costs.

Last year brought much news about the USDJPY carry trade, or holding a trade merely to gain interest.  At the time, the Japanese lending interest was far below the borrowing interest paid by US banks, investors could simply borrow in Japanese yen to deposit into US accounts and make money on the interest.

Carry trades are usually highly leveraged, forex accounts allow up to 400:1 leverage at some brokers.  This kind of leverage allows an individual to control $1,000,000 in currency with just $250 down.  This kind of investing is very dangerous and also compounds the effect when the markets turnover, or the trade becomes unprofitable for carry trade investors.

The dollar faces a critical problem, at this point the Federal Reserve Board is pushing rates so low that it may soon be privy to being the new carry trade currency.  This has already happened with the Eurozone and the pound as the dollar is now pushing low interest rates that are a few points lower than the central bank rates in other countries.  This creates unnecessary selling pressure when investors go to sell dollars and buy other currencies to profit from the interest rate difference.

When the USDJPY carry trade broke down, investors quickly bought back Japanese Yen to cover positions.  This caused the yen to advance by 20% in 2007.  As rates were lowered and investors lost confidence, the dollar was sold to buy yen which moved the exchange rate from 120 yen to the dollar to less than 100.

This puts a daunting strain on an already hurting US Dollar.  If the same carry trade that perpetuated with the yen persists in the opposite direction with the Euro and GBP, the value of the dollar will continue to slide.  In this kind of position, investors borrow dollars to deposit in Euro banks.  This puts artificial selling pressure on the value of the US Dollar, causing it to correct.

Further action by the Federal Reserve to cut interest rates will only hurt the dollars value, pump up the price of commodities and cause a dollar sell off in favor of other currencies.  The difference between interest rates is still tight, but a further move of 50 or 75 basis points will be the beginning of a large, multi-year carry trade.  We’ll have to see how the Fed responds, surely they know that further action will create a large difference in interest rates and more selling pressure.

Historically the market has boomed after Federal Funds rate cuts.  The ease of finding low rate credit makes its way to financial markets, serving up a boom period every time rates are lowered.  This time, no matter how low rates are going, the markets are not responding.

The credit crunch is still underway.  While the Federal Funds rate is approaching new lows, there is still mal-investment to be taken out of the system.  A recession is a normal part of the business cycle, the market moves to expel any unnecessary credit.  The last few months of price action is housing and in corporations can be seen as this removal of credit.

In the past, lowering the rate and opening up the Reserves to more money would create more new credit than was disappearing.   While this does produce short term inflation, it would also boost confidence until the money supply could then be deflated later.

Unfortunately the money supply has not been deflated since 1929, the last great depression.  Almost all depressions are created from a contracting money supply, the Federal Government knows this and will do anything in its power to avoid it.  The real problem isn’t in the current M0 money supply of $900 Billion, its in the M3 supply of over $10 Trillion.

While just $900 Billion in hard currency is in print, $10Trillion exists in the form of credit and loans.  Just simple mathematics will tell you that the amount of credit is ten times higher than the actual amount of cash.  It is natural for a market to try to correct to its actual value, the last 10 years is full of too much credit resulting from housing and loans against the inflated value of homes.

The Federal Reserve has the tough job of keeping the money supply at the same number to thwart of deflation and keep inflation worries away.  If the market doesn’t respond to this next half-point cut, chances are that we’re not going to see a rebound any time soon.

Gold has been touted as the historical hedge against an inflated currency. Today, investors are scrambling for gold to protect their assets against a credit crunch, recession and possible stagflation. As gold nears $1000 an ounce it is time to consider how to invest in precious metals and just which metal is best for a dollar hedge.

Gold is the universal currency. Before 1971, US Dollars were legally backed by gold reserves (legally, certainly not entirely). Today most currencies, with the exception of the Swiss Franc, are fiat; their value coming from the faith in the governments that issue the currency. Before Bretton Woods in 1944 and the global shift from gold to dollars, gold was used as a way for governments to balance deficits at years end.

Gold is still considered a hedge to rampant inflation and recession. Gold’s value is intrinsic, the value of one ounce of gold does not change, the value of currency changes relative to gold. At least that is the view of most economists.

While gold may provide a nice hedge to a falling currency, silver is a much better investment than gold. Silver is used in thousands of products and has a heavy demand stemming from its use in traditional photography. The demand for silver is up dramatically in the last few years, without government and institutional sales there would actually have been a silver deficit last year.

Silver also benefits from a lower per ounce price. While gold costs $990 per ounce, the price of silver sits at just about $20 per ounce. The sticker shock of gold prices is likely to occur in the $1000+ ounce area while silver has much room to gain before sticker shock sets in. Sticker shock is likely to keep gold prices from ever hitting new territory while silver has room to tack on extreme percentage gains before the same price shock sets in.

Silver’s main advantage might come from the futures market. Short sellers on silver are all over the place and some analysts think that the amount of shorts is greater than the world supply of silver. As short sellers start buying to cover their positions, the explosion in silver prices will likely follow. Too many positions have to be covered and by only one method- purchasing silver on the open market.

The greater demand, smaller price and the market dynamics of silver make it a far superior investment than that of gold.

tesin’ the first investing post.