Wednesday, January 13, 2016

Stock Market: The Oil Farce

(Drivebycuriosity) - This year´s stock market performance is a farce. A farce is a"comic dramatic work using buffoonery and horseplay and typically including crude characterization and ludicrously improbable situations" (google). Stock prices are glued to the price of oil. Whenever oil falls, stocks drop in solidarity.

This is ridiculous. The oil price drop is not a sign of weak demand and not a symptom of a coming global recession. Americans burn more oil because they are driving more and China imports more of the fuel as well (marketwatch). The oil price collapse is just a response to the oversupply caused by the bubble of the years 2011-2014 (driveby).

This morning we learned that US oil inventories rose sharply and that US oil production is still climbing (seekingalpha).  This message sent oil prices south again and stock prices followed with blind obedience.

The oil stock linking is irrational. Cheap oil works like a global tax cut. Consumers have more money to spend for other goods & services and companies have lower costs. The Telegraph" calculates that already "almost $2 trillion of annual stimulus from cheap oil" is working through the global system (telegraph). The current oil price collapse reminds of the years 1985/86. Then Saudi Arabia flooded the markets - as they do today - to get rid of their competitors (driveby).

The 1986 oil price collapse didn´t cause a recession, quite contrary. The US economy grew in the years 1986 & 1987 each 3.5% (annual GDP growth) and the growth rate accelerated to 4.2% in 1988 (worldbank). In the period 1985 through 2000 cheap oil in combination with falling interest rates (thanks to low inflation rates) and a technological revolution (Internet) induced a period of prosperity (with the exception of 1992 as the first Iraq war caused an oil price spike which caused a mild and short-lived recession), the longest boom in U.S. history (factcheck).

I assume that cheap oil will boost the global economy and rekindle the bull market in the coming months (as it did in the 1980s) and we will see new all-time highs on the stock market before the end of the year.

PS For illustration I used the painting "Allegory of a Farce" by Romulo Galciano.



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