"How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn't make it a leg" Abraham Lincoln

On the surface, market's behavior on certain days of June and July 2008 was so illogical that my brain simply refused to accept it. Double digit intraday swings in prices of stocks without any material new catalyst became so routine that as Bloomberg reported last week -

"The number of men in the City who sought help for depression and stress rose 47 percent from a year earlier..."

But hopefully last week's trading has finally explained what should have probably been very clear for while - while current economic trouble might have started with the "lax credit/underwriting" standards and ensuing subprime fiasco, they will likely end/continue based on the behavior of the other, seemingly unrelated macroeconomic input- oil prices...
Forget the "naked short selling" hype or Fanny and Freddie talk- these are simply headline grabbers and symptoms of the underlying core illness of today's US economy that Federal Reserve conveniently calls "noncore" (read oil) inflation. And while my article below might not necessarily accomplish the main purpose of the Strategy Lab exercise-sharing new investing ideas, I hope that given the upcoming finish of the current round, readers will cut me some slack for simply sharing an opinion on the widely discussed topic...

Someone famous once said- "The solution to high oil prices is called high oil prices". However naïve or cruel it might sound on the surface, unfortunately the reality of the most recent several months seems to support it. The seemingly unstoppable rise of oil prices over the last several years has brought chaos and pain to so many sectors of the US economy that even the "presumably conservative" US politicians have called for the "gas tax holiday", which is supposed to give consumers a short term "relieve" at the pump.

Unfortunately in my opinion, the solution to our current economic woes lies actually in the exactly opposite direction- making sure prices for the main final product of oil- gasoline stay high long enough...Before you start judging too quickly- let me explain...
Many very famous economists have been arguing for years that gasoline demand is so inelastic, that even doubling or tripling of the oil prices was not going to make any difference. US consumers are supposed be so addicted to the "gas guzzling" trucks and SUVs, that even a suggestion that demand could possibly decline at some point has been ridiculed by pretty much every politician/economist out there.

What's more, one might argue that this notion was even actually supported by hard data- even when oil prices doubled and tripled from their multiyear lows of early 2000s, the growth in demand did not really slow... Amazingly enough, contrary to the conventional beliefs, early this year, in April of 2008 to be exact, the unthinkable finally happened- sales of cars have overtook truck/SUV sales and gasoline demand finally faltered... According to the data from the Energy Information Administration, gasoline demand in the US has been running consistently below last year's levels since the beginning of 2008. And while, it is certainly difficult to pinpoint the exact price level that triggered this seismic change, the demand for the supposedly inelastic product started to decline somewhere around the "magical" $4 a gallon.

Continued...