The U.S. was able to make up for the loss of oil production caused by the U.S. "Peak Oil" of the early 1970's by increasing imports. Obviously, planet earth does not have this option.
So here we are, now what? The Fed, as well as the other Central Banks, has injected huge sums of liquidity, lowered rates, and bailed out a major Wall Street investment bank. With all of that liquidity the stock market (as measured by the S&P 500) can't manage a decent rally. I would have thought one would have been forthcoming, though I was unenthusiastic (and I view any rally as a selling opportunity for anything not commodity related).
Dr. Spock, (Dr. Saif Lalani) asked me if I thought the stock market could go higher if oil went to $120. At first I thought, "sure, why not? With all that liquidity..." but the more I think about it, it seems that if the "market" went up, it would be all commodity related equities going up more than non-commodity equities went down... well, that's not the same thing, is it?
Let us recap: The U.S. has a negative savings rate, our equity markets are in decline, housing is in free fall, banks are tightening lending standards, food and energy prices are rising smartly, the U.S. $ has 2 black eyes and a couple of missing teeth, our trade deficit expanded in spite of a decline in the dollar which was supposed to fix that issue, and we still have Medicare and Social Security lurking in the background while at the same time the American Corporate Pension System has used a perpetual increase of financial assets of 9% in its model for funding pensions.
But at least we've got a couple of Presidential candidates that believe in "change" and "keeping hope alive"... so we got that going for us.
It seems that the peak in oil exports from oil exporting lands is upon us. So far, the U.S. has avoided major disruptions by outbidding poor nations for the marginal barrels it needs. That won't be possible for much longer, although I can't give a time period certain.
I can tell you this with great certainty:
The challenges faced by the U.S. $, the international equity and bond markets, and U.S. real estate as of today will PALE BY COMPARISON when market participants fully realize that the oil import decline is permanent. We will have to come up with a new moniker, crisis will not do.
What to do? At the risk of repeating myself:
Hard assets rather than financial assets.
Instead of trying to expand your business, shrink it and take the capital you would have used for expansion and buy hard assets.
Stay clear of investments or businesses that are car, employee, or transportation dependent. Railroads over trucking and airfreight; apartment buildings over suburban housing.
The decline in energy availability will shrink aggregate GDP, which means that everyone, on average, will be poorer. Yes, there will be exceptions on an individual basis but in the aggregate this, too, is a mathematical fact.
The time to blow up the life raft is BEFORE your boat sinks.
Yours for a better world,
Mentatt (at) yahoo (d0t) com
4 comments:
Dr Spock? That would make you Captain Greg?
Why is $120 a barrel a cutoff number for a stock market plunge? I would not link price of oil to price of stocks necessarily. While oil availability AND affordability is definitely a prerequisite to real economic growth the Dow could actually increase in nominal terms and still be worth less in real terms if we had an inflationary environment. Since the Dow is basically a result of manipulation from the top and hallucination from the bottom it should mean nothing to us (unless of course we find a way to make money from this charade).
But money or no money, I agree totally with Greg. Everyone will be poorer in real terms when the oil increases in price. In every measure we will suffer the reduction in Medical care, transportation, work and play opportunities, entertainment, eating out, freedom, safety, food security, ability to read at night, use a flush toilet, take long hot showers, surf the net, call your mom long distance...... When you think about it, even a queen in Victorian England couldn't get an surgical operation performed on her in aseptic conditions, under general anesthesia. She had neither a flush toilet or a shower. She couldn't fly at a whim to India overnight. All this is thanks to oil. And with Russia in decline we are screwed. Because Russia will drop fast, just like Mexico if not faster.
Best,
Chuck H.
Never used the word plunge, nor crash, or any other such heated and leading expression.
Thank you for your comments.
And it is absolutely true that the Dow will likely gain in nominal terms.
I believe I said that rising oil prices and an increasing trade deficit due to higher oil prices MIGHT be holding back the U.S. market - which has enjoyed a liquidity bath like no other.
I also said that any rise in the markets will tilt toward the commodity players.
At $100 per barrel the OIL trade deficit is nearly $500 Billion per year for the U.S. This would seem to bring the nasty vicious cycle of higher energy prices pressures the $ further, and the declining $ continues to push oil prices up in $ terms...
This does not give much incentive for foreign investors to hold $ denominated securities...
Dear Greg:
Sorry. Me bad. You didn't say plunge.
The market may head higher nominally or lower nominally but in real terms I would not be putting my money into it. I worked too hard for it and can't afford to loose it. I like the shiny gold metal for storage of wealth.
IMHO there is still a very high chance of deflationary implosion. I am actually betting on that. Now that doesn't mean that prices of food and energy are not going to continue going up. That is baked into the cake. However the assets such as real estate, and financial assets can dramatically decrease in price. This is simply because people will loose jobs and money in the market but they will still need to eat. They may need to sell stocks and houses just to pay for the food and gas. That is my bet for what is going to happen in the future. Stagflation on steroids until penury is reached at the end of the spiral. Then assets are going to be repurchased by the wealthy for pennies and the whole thing starts all over again with the survivors who are at that point are happy to be slaves as long as they get a piece of bread on regular basis. Perhaps I am too pessimistic. I hope so.
You rock,
Chuck H.
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