Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 2

1990 and the First Persian Gulf War

In the fall of 1990, my earlier book on intermarket analysis was just going to press.¹ In the Appendix, I included charts of the most important intermarket relationships through the third quarter of that year. It was gratifying to see how well the markets followed their intermarket script despite the Mideast crisis that gripped the global financial markets during the summer of 1990. But that was only part of the story. Iraq invaded Kuwait in August of that year, which made a bad situation even worse. However, intermarket relationships had started to deteriorate at least six months earlier. As was the case during 1987, the deterioration started in the bond and commodity pits during the first half of the year. Bonds started to fall at the start of the year, while commodity prices rose. The dollar was weak. Then things went from bad to worse.

After the Kuwait invasion, crude oil soared to $40 a barrel which pushed stock markets lower all over the world. Gold prices also jumped as the dollar and stocks weakened. These are both classic intermarket relationships. Interest rates jumped all over the world in reaction to higher energy prices. The result was the start of a recession in the United States a month after the invasion. (This was not the only time that rising oil prices had contributed to a U.S. recession. The U.S. economy had suffered four recessions since 1970. Three of the four—those that took place in 1974, 1980, and 1990—were ...