Long-term Trend Watch:  CIBC economist Jeff Rubin predicts $100-a-barrel oil to become the new normal.  The article doesn’t mention Peak Oil by name, but the analysis is the same.  Oil production from traditional sources like Mexico, Kuwait and Russia are declining.  Candadian tar sands oil might temporarily fill the gap, but the long term trend in production is down.  Nuclear and biofuels will be needed to fill the gap.

I have read Hubbert’s Peak by Kenneth Deffeyes about the Peak Oil theory and find the argument pretty compelling.  Read more and decide for yourself.  In the meantime, its a good personal hedge to own some oil stocks.

Business Cycle Watch:  Bill Gross at PIMCO thinks the Fed Funds rate needs to get to 3.75% or below to be neutral for consumers and moderate the housing crunch.  He acknowledges, however, that the global economy complicates the job of central bankers and that such a level of rates would be stimulative for the business sector.

In my mind that is OK.  Now that the government sector in the US is running at a basic balance, fiscal policy is now neutral.  The political climate does not indicate that the government will increase fiscal stimulus anytime soon.  The decline in the dollar is stimulative to exports and the profits of multinationals, but the dollar is now bumping along the bottom of its historical range and policy makers are reluctant to force it lower.  Households in the US have been running a deficit, but the end of the housing boom is leading to a retrenchment and a rising savings rate.  The one sector of the economy that has leeway to move to a more stimulative posture is the business sector, which has been running a surplus (more cash flow than investment) for most of this decade.  An increase in business investment would be just what the doctor ordered.

Long term trend watch: In today’s WSJ, Judy Shelton writes an interesting opinion piece [subscription requred] about the perils of a fluctuating value of the dollar.  She basically endorses Robert Mundell’s call for the world to get together and create a global currency system, likely based on gold.  As I suspect that near the end of this decade the currency-manipulation, inflation and trade chickens will come home to roost, I can see the US taking the lead on creating a new Bretton Woods-type currency system. 

Of course, I believe there is no true panacea out there, and that we will end up trading one set of issues for another.  But that is just the way the cycle turns…

Business Cycle Watch:  In this week’s Outside the Box from John Mauldin, he gives us a report from GaveKal on how those betting on renewed inflation after the Fed rate cut may be thrown off guard by declining velocity of money.  This makes sense given the collapse of the CLO market and the billions of hung LBO financings.  It is also something that no economist focuses on or even understands, as far as I can tell.

I am torn.  My suspicion is that we will see something similar to what we got in the last cycle: a falling dollar and rising commodity prices (although probably not as much as in the last 5 years), but mild headline inflation due to increasing manufacturing productivity and globalizaiton.  The big difference will be dealing with housing deflation instead of inflation.  The balance of risks supports the Fed’s move for now, since the cuts can always be taken back.

By the way, I recommend reading Our Brave New World from the guys at GaveKal.  Very interesting take on how our economic world has evolved in the information age.  Its a short book and well worth the time.