Sunday, December 14, 2014

Economy: Oil & Stock Market - What A Stupid Response

(Drivebycuriosity) - Last week the US stock market suffered the worst week since 2011 (bloomberg marketwatch). If we believe to Reuters, Bloomberg, MarketWatch and other media the stock market got into the maelstrom of the collapsing oil prices. According to Bloomberg "the drop in crude below $58 a barrel raised concern over the strength of the global economy….Fund managers said anxiety is building among clients and themselves" (bloomberg).

I think last week´s stock market activity shows how stupid the stock market can be. 

Collapsing oil prices are not a sign of a weakening global economy. We are just experiencing a bursting bubble. For years I have been writing that oil is "the mother of all bubbles" (driveby) and the "greatest bubble of them all" (driveby).

From 2009 till last summer the price of oil was way too high and didn´t reflect the economic fundamentals. Instead oil prices were inflated by geopolitical factors and an ongoing speculation on a severe supply disruption because of wars & conflicts with and in Russia, Iran, Iraq, Syria and other major oil producers. The rising oil production and falling demand in the USA, both thanks to the technological progress, had been ignored as has be the comeback of the Iraqi oil production. Inflated oil prices fostered oil supply and suppressed oil demand which lead to an oil glut that finally let the bubble burst.

Falling oil prices work like a huge tax reduction and are the best stimulus program for the global economy we could get. In the 1970s the world experienced a similar period of high oil prices which let to global economic stagnation (chartoftheday). In the early 1980s oil prices dropped from around $120 to below $30. Oil stayed cheap until 2002. This started a period of falling and low inflation rates and sinking interest rates which was accompanied by an epoch of prosperity. From 1982 to 2000 the Dow Jones multiplied with the factor 10 and climbed from around 1,000 points  to 10,000 points.

I looks now that we are entering a new period of cheap oil which should lead to a new period of prosperity and rising stock markets comparable to the time span from 1982 to 2000. Last week we learned that US retail sales already accelerated in November - and the retail sales in China also gathered speed - because consumers spend less for gasoline and have more money in their wallets.


PS For illustration I used the painting "Ship of Fools" by John Alexander (Smithsonian American Art Museum, Washington DC).

1 comment:

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