Cognitive Dissonance and Dunking

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Part of life is accepting your shortcomings, and trying to move beyond them. For example, I have had to come to terms with the fact I will never be able to dunk, or write ‘citizen’ without questioning its spelling. (Every single time). When it comes to trading, there is a limitation known as cognitive dissonance, where you may hold a certain opinion about a market, despite evidence telling you something to the contrary.

The potential for higher interest rates in the coming months underscores why we need to be vigilant about how certain events can impact energy, even if they seem unlikely, uncertain, or disconnected. So via the unemployment rate, here is a winding path back to energy which highlights the need to be aware of cognitive dissonance, and to keep an open mind.

In the July jobs report, the unemployment rate held at 5.3% – the lowest level in seven years. This has a bearing on vehicle sales, as there is a strong relationship betwixt it and unemployment. This makes logical sense, given the necessity of a car to drive to work for a good chunk of the population.

Inverting the unemployment rate, we can see how the lowest ebb of vehicle sales is a leading indicator for the peak of unemployment. What is less intuitive is how the peak of vehicle sales seems to signal a rebound in the unemployment rate; as we see vehicle sales topping out, we should be vigilant for a turn in the unemployment rate also.

vehicle sales versus the unemployment rate

From vehicle sales we move onto vehicle miles traveled, and how they seemingly peaked in the US just prior to the great recession (an ironic term, I know), as higher gasoline prices combined with a cratering economy to steer people off the roads.

A second one-two punch combo came in the form of changing US demographics as it meant a change in driving behavior: an aging population meant more older people on the roads (who drive less miles), while the younger folk chose not to buy a car (for financial reasons, or location – living an urban lifestyle and using public transport).

As we left the great recession in the rear-view mirror, a combination of new factors also appeared to be contributing to lesser miles driven – from telecommuting to online shopping. But as we accelerate through the middle of the decade, a modest economic recovery combined with a considerable drop in gasoline prices have finally encouraged a return to hitting the gas. What seemed like a turning point eight years ago, now turns out to be just a previous high: vehicle miles traveled are now at a new record:

vehicle miles traveled

 

For this record to be achieved, it makes logical sense that gasoline demand would have to respond also…….and it has. Although it too went through a multi-year slow-motion troughing, it is now marching higher, further boosted by retail gasoline prices spending much of this year