Oil spike will hurt Britain
At MoneyWeek we’ve never really believed that the long-term bear market in stocks ended in March 2009. But at the start of 2011, we did say that the prospect of ongoing central bank money printing (quantitative easing – QE) would probably prop up stocks for much of the year ahead – barring a crisis.
Well, now we have our crisis. It took stockmarket investors a little while to grasp that a rolling series of revolutions in one of the world’s most geopolitically volatile regions was actually bad news, rather than yet another opportunity to ‘buy the dips’. But they seem to have got the message now, helped by surging oil prices and rumours of upheaval in Saudi Arabia. Stockmarkets were arguably overvalued anyway – Jeremy Grantham at GMO pointed out, in a recent letter written before the Tunisian revolt, that bulls are “living on borrowed time” and that by his calculations the S&P 500 is worth around 910 (it’s currently at around 1,300).
But on top of this, an oil shock is a very tough economic nasty to deal with, particularly if you’re a net oil importer, as Britain is. High oil prices both slow the economy down (people spending more on fuel bills have less to spend elsewhere) and drive prices higher. That’s the unholy combination known as stagflation. With Britain already in a fragile state, “this oil price spike couldn’t be happening at a worse time”, as Stephen King at HSBC puts it.
• Read the full editor’s letter here: Oil spike will hurt Britain