Being Prepared for the Fall in Oil and Interest Rates

Wet and Wild in California, and the Markets

I live in California, and that means today I’m soaking wet.

Last month, woes about the worst drought in decades had everyone scurrying to save water and finance bond measures to build more water infrastructure. This morning, the rains are formidable, with heavy downpours throughout the state causing major damage to homes and businesses, as well as roadways and vehicles.

While watching the rain siege outside my window this morning, I thought about the reactionary nature of human beings. We react to a drought too late. When it rains in virtual buckets, we scramble for the sand bags and try to cope with the deluge.

So, what does this all have to do with the financial markets?

Well, policymakers in Washington, at central banks around the world and even just regular investors tend to react to circumstances they can’t control. Much like the weather, there are many things that can’t be anticipated or controlled. But rather than reacting to them after the fact, why not be prepared for them beforehand?

I know this makes sense, but most of us just don’t do what we should to prepare ourselves for the inevitable droughts and downpours in life.

In the markets, there’s been a downpour in the price of crude oil of late. Oil prices now have tumbled to five-year lows, and they’ve done so in ultra-rapid fashion. The chart below of the iPath S&P GSCI Oil fund (OIL) clearly points out this situation.

There’s also been a big, unexpected decline in interest rates this year. The chart below of the yield on the benchmark 10-year Treasury note ($TNX) illustrates that downpour as well.

On the surface, this situation looks like a reason to be bullish about America. Our economy is getting an extra boast from the downturn in gas prices, as well as continued low interest rates.

Yet there’s a problem with this reality.

These two trends, along with a sharp rise in the value of the U.S. dollar vs. rival foreign currencies, are warning signs of another bout of disinflation, or possibly deflation.

Deflation is the worst-possible scenario for stocks right now. We saw a deflationary sell-off in stocks in 2008 and 2009, which, of course, had other causes as well. And while I’m not forecasting that outcome here, there are many sectors of the market (energy, multinationals and commodities) that will feel the pain from the deflationary downpour.

In my latest weekly podcast, sponsored by my firm Fabian Wealth Strategies, I go into much more detail on the implications of investing in a deflationary world.

So, if you want to prepare for the drought of deflation, and the downpour in sectors related to this dangerous prospect, then be sure to listen to today’s latest broadcast.

NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.

A Rainy Longfellow

“Into each life some rain must fall.”

–Henry Wadsworth Longfellow

We learn from our mistakes, and we learn the value of preparation from disaster. If you get caught in a storm, remember that it’s up to you to prepare yourself for the consequences before you get stuck in the mud. If you don’t, then you have no one to blame but yourself.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about how China’s economy passed the U.S. I also invite you to comment in the space provided below.