Thursday, February 24, 2011

High Oil Prices Have Fund Managers Moving Into "Risk Off" Mode

Let's ask ourselves "what is the true cost of oil". Economists are furiously downsizing their economic growth forecasts for 2011 in the wake of the oil price spike, both for the US and for the world at large. Since last week, West Texas crude prices have soared $12 from $86 to $98. Each $1 increase in the price of oil jumps gasoline prices by 2.5 cents. Each one cent rise in the cost of gasoline takes $1 billion out of the pockets of consumers.

If oil stays at this price, it removes $30 billion from the pockets of consumers. At $110 a barrel, it short changes them by $60 billion, or 4.1% of GDP. Subtract this out from even the most optimistic GDP forecasts for this year, and you end up with negative numbers. That, my friends, is what they call a recession. If you wonder why hedge fund managers have lurched into an aggressive "RISK OFF" mode, are throwing their babies out with the bathwater, and why the volatility index is spiking to three month highs, this is why.

Posted courtesy of our partner John Thomas, "The Mad Hedge Fund Trader"


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