The lesson of the petro-dollar
You’ve heard the reasons that oil is trading above $140 a barrel, says USA Today in an editorial. But aside from the usual suspects—rising global demand, falling production capacity, bigger cars, and no meaningful U.S. energy policy—the record oil prices are also a “no-confidence vote in the U.S. economy and currency.” Take the dollar. If it hadn’t weakened 45 percent against the euro this decade, oil would be at $100 a barrel. Investors are turning to oil as a sort of bet that the U.S. won’t “face up to its problems,” namely a “destructive borrow-and-spend habit” afflicting consumer and government alike. In that way, oil is now “a kind of alternative currency,” like gold. And it will punish us until we shape up.
If not equities, what?
With the Dow just finishing its biggest first half percentage drop in 38 years, says David Bogoslaw in BusinessWeek.com, spooked investors have been turning to the safety of U.S. Treasury bonds. But while they’re safe, Treasuries now have yields “near current inflation levels,” so they aren’t very profitable. “So, what should investors do?” These days your fixed-income needs might be best served by investment-grade corporate bonds and certain asset-backed securities, like from Fannie Mae and Ginnie Mae. With inflation and other economic question marks looming, choose high quality debt, like corporate bonds in the energy sector. These should give you a good place to park until “the stock market stops looking so ugly.”