The price of gasoline at the pump may have the biggest impact on the growth prospects for the economy in 2011. On Monday 12/27/10 the U.S. Department of Energy (DOE) reported that both diesel and gas prices climbed to the highest point in more than 2 years during the prior week. The national average price for regular gasoline increased 7 cents (2.3%) to $3.052 per gallon and diesel increased 4.6 cents (1.4%) to $3.294 per gallon. Crude oil closed Monday at $91 per barrel up $2.19 (2.5%) since last Monday. As the price of gas continues to rise, every 1-cent increase in the price of gasoline decreases the U.S. consumer disposable income by about $600 million per year. Over the last 12 months the price of regular gas has increased from $1.75 to $3.02 a gallon and in turn has taken over $76 billion out of consumers pockets.
At the peak of crude oil prices in the spring of 2008 the national average for the price of gas was over $4.25 a gallon. If the global economies continue to recover then I would expect world wide demand for oil to increase and in turn the price of gasoline to continue to rise. I believe we can break the previous high in gas prices without going to a new high for crude oil. Keep in mind that the administration wants to add 15 cents per gallon to fund green energy projects. That increase alone, should it go through, would drain an additional $1 billion from the wallets of Americans.
Stock and Bond Markets
The market is at levels that I feel are unsustainable in the near term and therefore I think we are heading for a serious correction. For 26 weeks this year investors were taking money out of stock mutual funds and switching to bond mutual funds. Then when bond prices began to fall investors took money out of bonds and went into stocks at close to the near-term high in the stock market. The stock market continued to rise in the face of rising long-term interest rates. Interest rates and stocks cannot go higher at the same time. One will have to break. I think a decline in stock prices may bring about a short-term rally in bond prices again causing investors to make the switch back to bonds.
I would expect that the stock markets might well end up 2011 at or near the level at which they closed at the end of 2010. The road to get to he end of 2011 may be full of significant declines that dash hopes and monster rallies that raise hopes. By the end of 2011 investors will be depleted of energy, and in some cases their money.
Conflict between the Congress and the administration will not help with the decision making process for the leaders in the private sector, including small business people. All the clarity that many people hoped and believed would come about because of the November election may not materialize. Uncertainty will continue about taxes, health-care, budgets, and the national debt. All of this uncertainty will spill over into the currency, commodity and stock and bond markets.
Municipal Bonds may be the story driving markets in 2011
The problems of state and local unfunded liabilities for retirement health care and pensions will take center stage and I think will be in the headlines daily during the first quarter of 2011. The same companies, Moody’s and S&P, who told us the sub-prime mortgages were not a problem are telling us the municipal markets are fine. They do not see any significant defaults or bankruptcies in 2011. I wish I were as confident as they are.