Sunday, January 25, 2015

Moving Forward

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12.17.14 - The New Paradigm for Global Markets

Most people seem pretty happy about the recent plunge in oil prices.  Gas prices below $3.00 make it tempting to leave the Prius in the garage and fill up the motor home just for fun.  For those of us who came of age early enough to remember odd/even lines at the pump, it is a matter of uncontestable faith that rising energy prices are bad for America, while falling energy prices are good for us.  Make no mistake; falling energy prices are a good thing for the global economy.  Growth will rise and inflation will remain low.  But winners as well as losers are emerging.  Energy consumers will benefit.  Think US motorists, airlines, mining companies, and manufacturers in Europe, Japan and China who have suffered a competitive disadvantage resulting from cheap US natural gas.  Energy producers will see a large drop in revenues.  Think oil companies, solar and wind developers and their suppliers.  Also countries and regions dependent on oil exports like Russia, Iran, Iraq, Venezuela, Nigeria, Libya, Texas, and North Dakota.  Decades of dependence on foreign energy producers have molded our reaction.  Unlike Russia or Japan who will experience a net loss or gain of wealth, a newly energy independent US will see most of the wealth transfer as an internal event (from energy companies to consumers).  Lower oil prices no longer represent a big windfall to America.

The benefits of lower oil prices are already apparent to consumers at the pump and to retailers at the checkout counter.  Energy companies are reassessing their capital spending and payrolls, while the US balance of trade, which had been improving, now looks poised to reverse.  The loss of energy company earnings and global competitiveness will play out over the next few years.  Cheap oil will reduce some US manufacturing costs, but the direct impact will be outside our borders.  Throughout modern history, oil was almost always a cheaper source of energy than natural gas.  That changed over the past few years when the revolution in shale drilling reduced US natural gas prices to below $4.  Combined with new deep water and horizontal drilling techniques, US energy output doubled since 2008.  At $14 for gas and $110 for oil, the rest of the world simply couldn’t compete.  US growth accelerated, while growth in the rest of the world has languished.  The US growth advantage was reflected in the recent sharp appreciation of the US dollar.  Now in just a few months, dollar appreciation combined with falling oil prices has wiped out most of our competitive advantage.  Suddenly, Japan, Europe, and China are poised to re-emerge as serious competitors.  Those countries have other serious problems, but lack of global competitiveness is no longer one of them.  The effects will take months and maybe years to fully be realized.  As the gap between US and non-US growth shrinks, the US dollar will surrender its recent gains.

This makes a weaker US dollar the big financial surprise of 2015...Continue Reading...


From the Archives...


10.9.14    - Markets Rolling Over

5.30.14    - Bank Lending and Economic Growth

3.21.14    - March Flash Update

2.20.14    - February Flash Update

1.15.14    - 2014 Annual Forecast

12.10.13  - Bursting of the Bond Bubble

11.13.13  - A New Top for Stocks? 

7.23.13    - Bursting of the Bond Bubble

5.9.13      - The TINA Hypothesis

4.15.13    - The Bernanke Illusion

3.15.13    - US Economic Outlook

2.1.13      - 2013 Annual Forecast

12.10.12  Tax Reform: A First Step

9.17.12    QE3

5.1.12      All the Good Ones Are Taken

3.12.12    March Flash Update

2.23.12    February Flash Update

1.11.12    Annual Forecast


1 DOW 17,672.60
-141.38 (-0.79%)    
2 S&P 2,051.82
-11.33 (-0.55%)    
3 NASDAQ 4,757.88
+7.48 (0.16%)    

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