$108.02

During these times it is good to keep track of the oil price as it presents us with a good indicator of what’s happening in the economy. Currently, it’s at $108.02 and has been rising.

These two major things have happened this week:
1. $700 billion agreement plan
2. Investors worried about the U.S. dollar, debt, and inflation

When government spending increases, this tries to stimulate and shift the demand to increase GDP, but this can also increase the price level. When people hear inflation, they want to hedge themselves from it, and buying crude would be a good idea.

We can probably dismiss our expectations of another oil price peak anytime soon as the uncertainties and the weather has been playing down on US demand for oil.

Uncertainty

It certainly has been a hectic week. The proposed bail-out plan has been criticized, analyzed, debated, everything short of being implemented. Finally, today some sort of plan has been agreed upon.

It is important to ask one question though: how effective will this $700 billion be? Because as this money is pumped into the economy, sure there is more credit around and we get the trickle down effect. Where does this money come from? Ultimately from the taxpayers, or perhaps we add it to the budget deficit, which is already at half a trillion.

I guess it is easy to blame the United State and criticize them, but given all these problems that have been occurring, we are moving into a new age. The US potentially can lose its superpower status in the global economy. Perhaps with this crisis we will learn a valuable lesson and be a bit more cautious with investing in North America.

To short or not to short?...not

In desperate times, we certainly do look for desperate measures. At least 10 countries have imposed rules and conditions to deter investors from shorting stocks. The FSA on Friday revealed a list of 29 companies it would protecting from short selling. The SEC revealed a list of 800 companies it would protect until the 2nd of October. Taiwan just recently also has banned short selling.

However, there is always a flip side. A lot of private investors and funds use shorting as part of their strategies. Definitely a lot of funds will have major losses. In fact, plans are underway to sue the FSA on the principle that they caused illegitimate "capital destruction." Hedge funds are not all evil and require shorting in options trading, risk arbitrage, convertible funds, etc. We often find hedge funds being responsible for some crises, but this time, these funds do not feel like being scapegoats.

One hedge fund manager commented on the situation: "By stopping the short sellers, you are artificially inflating prices and rewarding speculators on the long side. The measures will increase volatility.” Although this seems rather obvious, there is substance to such a statement. Shorting has also been argued to be beneficial in eliminating overpriced stocks.

For now such a ban will definitely be beneficial in bringing the global economy to equilibrium, but only time will tell how truly effective this short ban is.