KINGSTON, NY, 23 MAY 2018—Surging prices at gas pumps, hitting just as the travel season kicks off, is a trigger that will set off economic and equity market ripple effects that will crunch consumer spending, push inflation higher and pressure the Fed to aggressively raise interest rates.
Over the past two weeks, the average price per gallon of gas in the U.S. jumped 10 cents to $3, according to the Lundberg Survey. And in some states and cities regular gas has hit $5 per gallon.
Rising prospects for Middle East War, Washington's decision to impose "the strongest sanctions in history" on Iran and more crippling sanctions on Venezuela following the re-election President Nicolás Maduro, have contributed to Brent Crude flirting around $80 per barrel.
DROWNING IN DEBT
With consumer debt expected to hit a record high $4 trillion by the end of 2018, and Americans owing 26 percent of their income to revolving credit debt – and finding it increasingly difficult to manage minimal monthly payments – they have no spare cash to spend on gas.
Indeed, four in every ten adults are not able to cover a $400 emergency expense. And more than 50 percent of all consumers are struggling to cover such basic expenses as rent and food.
Thus, as consumers spend significantly more at the pump, they will spend far less in the retail, restaurant and entertainment sectors.
Beyond consumers, the airline, shipping industry and nations across the globe, such as India which is dependent on oil imports, will also be hard hit.
MARKETS WON'T ESCAPE
On the Emerging Market front, as the U.S. dollar strengthens, equities have declined over 10 percent this year. With EM debt at $7 trillion, much of it dollar denominated, a rising dollar makes it more difficult for EMs to service their debt load.
And, as dozens of nations' currencies plummet against the dollar, with many commodities dollar based, such as oil, should the strong dollar trend continue, their stock markets will decline into bear territory and their economies will move into recession.
Since the Panic of '08, markets have been artificially propped up with cheap money fueling merger and acquisition activity and stock buybacks, both of which have now accelerated to record-setting levels as a result of President Trump's corporate-friendly tax bill.
And, with the Trump stock market rally over as we forecast, and global economies softening, should inflation pressures push the Fed to aggressively raise rates, neither Wall Street or Main Street are positioned to absorb higher costs.
TREND FORECAST: For the last 50 years, sharp rises in gas prices have been the precursor to market crashes and recession. In July of the Panic of '08, gas prices in the U.S. peaked at $4.11 a gallon, affecting numerous industries and fueling inflation, as the recession moved into high gear.
The current events forming future trends portend a confluence of several economic and geo-political dynamics – from pending war in the Middle East to the daily and worsening struggles of most consumers –that are clear signals of continuing market volatility and recessionary pressures.