Should you be buying stocks as crude oil spirals higher? Some contrarians think so.
They say that rising oil prices add to the strains of a tight monetary policy, pushing the slowing United States economy to the brink of recession. In response, the Federal Reserve will backpedal and start slashing interest rates, unleashing billions of US dollars in liquidity to global markets.
That theory rather contrasts with the prevailing concern in Asia, which is that inflation will rise on the back of higher energy costs. The Fed then increases borrowing costs to keep prices in line. Stocks suffer.
Markets appear to be agreeing with the latter view. Asian stocks have slumped as rising oil prices exacerbated problems closer to home. Hong Kong, with its currency peg and sensitivity to Wall Street, is down 11.3 per cent this month. Which means that if the recession theory is correct, markets at current levels are a gold mine. And coincidentally gold, says an analyst who holds the contrarian view, is part of the equation.
'The best indicator for inflationary pressure is gold prices and they're tanking,' said an analyst with an overseas brokerage.
In the old days rising prices would pass inflation into other sectors in a domino effect.
However, since we are not in an inflationary cycle - and thus salaries are not rising - consumers resist when high oil prices are passed into other sectors.