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Oil Prices Send Warning That Fed Is Toast


I have been oil price warning it has reversed and declined over the past two months, regardless of the war. I argued that an energy turnaround would eventually occur and would be consistent with my credit event thesis.

The implications here are actually very important. A decline in oil suggests that the Federal Reserve has over-tightened and that the financial system is in danger.

For what? At the heart of inflation are two main sources of inflation: demand (driven by consumers buying things) and cost-push (driven by commodities).

The demand side is clearly decreasing. Consumers are exhausted, high credit card rates are slowing purchases, and retail inventory behavior going nowhere confirms that things are running out of steam.

If the decline in oil prices continues, this will put an end to inflation driven by commodity costs (at least for now). Oil is strongly linked to inflation expectations because it enters all sectors of the economy. And while everyone thought the war between Israel and Hamas would cause oil prices to skyrocket, we found the opposite.

Oil, on the contrary, is now sending a message of disinflation.

Keep in mind that most major recessions and stock market crashes occur AFTER oil prices begin a steep decline. So for that to happen, it’s a very big deal. This suggests that the Fed’s current high interest rates are not only restrictive, but significantly so.

Small-cap stocks and Treasuries also support this narrative.

Last week saw strong performances from both sides, but this week so far has been eye-opening. Long-duration Treasury bond prices are rising and appear poised to surpass the previous week’s highs, signifying lower yields. Small-Cap Stocks Reverse. The fall in oil has a disinflationary effect, which lowers long-term yields. Disinflation against an exhausted consumer also hurts small-cap stocks, which are much more sensitive to the growth of the domestic economy than large-cap stocks. And even if this behavior only lasts a few days, if it continues, it suggests something much bigger is going on beneath the surface.

We’re not out of the woods yet. This remains a very challenging and dynamic environment that will continue to challenge narratives.

As of the date of publication, Michael Gayed did not hold (neither directly nor indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publishing Guidelines.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views stated in this report constitute our judgments as of the date of writing and are subject to change at any time. The information contained herein is not intended to be used as the primary basis for investment decisions nor should it be construed as advice addressing the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and the positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim any liability for any actions taken in reliance on any or all of the information contained herein. Michael A. Gayed is the publisher of The Lead-Lag Report and a portfolio manager at Tidal Financial Group, an investment management firm specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers. InvestorPlace readers who are new subscribers to the Lead-Lag Report can receive a 30% discount.


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