Nicholas F. Benton

Are Investors Waking Up?

When will the second shoe drop? The 214-point nosedive in the Dow yesterday was again blamed on the impact of high oil prices, and signals what will happen whenever it finally sinks in that this problem is not going away and will wreak unfathomable havoc on the U.S. and global economy.

The domino effect of the “peak oil” crisis facing the globe is what sends market investors scurrying, even if up until now it has been only in fits and spurts. Yesterday, for example, a higher-than-expected rise in the core consumer price index (CPI) was interpreted, in Wall Street’s usual lemming-like fashion, to mean that high oil prices are, indeed, reverberating throughout the economy. The core CPI does not include direct energy costs, and its rise was interpreted as indicating the effect of rising energy costs on the rest of the economy.

Investors have suddenly figured out that this will drive up prices everywhere, and will cause the Federal Reserve to have to raise interest rates faster than previously thought in order to tame its inflationary impact.

That, in turn, will mean access to capital will become harder for businesses to retain their expected rates of growth, and the conclusion to draw from that, of course, is that it may suddenly be time to pull out ahead of the resulting downward curve.

Well, duh! The only problem is that we’ve seen such episodic, one day confrontations with reality hit the markets before, only to see a return to la-la land right after that. So, it will be very hard to predict which one of these downturns like yesterday’s will actually signal a genuine investor panic.

The Falls Church News-Press has carved out for itself quite a unique role in the global assessment of the impact of the imminent peaking and subsequent decline of the world’s ability to extract oil as its primary fuel. News-Press columnist Tom Whipple’s weekly “Peak Oil” column now routinely gets circulated through web portals and links onto some of the world’s most popular sites discussing the subject. Whipple, a North Arlington resident, is a former career CIA analyst whose thoroughly-documented and prescient insights into the “peak oil” phenomenon published in the News-Press every week are in the forefront of this global dialogue.

Not even Tom Whipple, however, can predict precisely when the full-blown consequences of this will begin to be felt in an unmistakable fashion that not even a Wall Street investor or politician can ignore.

Nonetheless, the signals all point in the same direction. Now we are being told that gasoline prices at the pump can’t be expected to go down at all this summer, and never, ever to earlier levels. To prepare the U.S. population, talking heads on TV now routinely argue that $5 a gallon gas will not be out of the question but that, after all, that’s what Europeans are already paying.

Rosy predictions about the U.S. economy that have reverberated through the investor community come with the proverbial giant elephant sitting in the corner. Anytime anyone glances over at the frowning pachyderm, they’re quickly persuaded to ignore it. The reality is, however, either that thing is really there or it is not. If it is, it would be time that smart people stood up and started moving slowly for the door.

The other metaphor has a person falling out of a window on the top of a 44-story building. He’s on a cell phone with a friend as he descends, and keeps insisting that everything is just fine. It is, to him except for the breeze, right up to the moment of impact. So just how far from the concrete is our economy now? Was that the second floor of the building I just saw flying by?

The self-perceived role of our government in this scenario is not, unfortunately, to warn its citizens or to provide means for a soft landing. Instead, this government wants to shield us from such reality while it works feverishly not to reverse the descent but merely slow the public perception of it. It’s trying to succeed in an incremental unraveling, rather than a more catastrophic version, if only to keep everyone in their seats for as long as possible while it prepositions its corporate cronies to come out as close to the top of the rubble heap as possible.

It wants the rest of us to stay in the stew pot and not notice the temperature of the water gradually rising until one day we find ourselves and the veggies tossed in around us transformed into a puree.

From the citizens’ point of view, however, the one advantage to this approach is that it does not require any thinking or independent action.

You can e-mail Nicholas F. Benton here.