Financial Crisis Worst is Yet to Come, Market Forecasts Into 2015
His predictions don't seem that irrational to me.
Here are the predictions of my gut.
1. Oil will outpace the stock market during a recovery. We saw this during the last recovery and we are seeing it now. When the stock market rises, the price of oil rises more. The reason we are seeing it, at least in my opinion, is because there is no clear cut growth engine other than things that burn oil. We don't have an illusion of an energy efficient dotcom bubble to chase any longer. Future bubbles seem to be based on building things (in China) and then powering them (in China).
2. At some point, the rising price of oil will cause everything to come crashing back down again. The first problem is that the Fed needs to inflate or die. The second problem is that all things do not inflate equally. The third and most important problem is that the inflation of some things causes serious economic pain.
Maybe I just watched too many Mel Gibson movies. That's what my gut thinks though and why I can remain a stagflationist long-term even though deflation has arrived.
Cushing, OK WTI Spot Price FOB (Dollars per Barrel)
Note that the price of oil bottomed at $30.28 on December 23, 2008.
Bloomberg: Energy Prices
Today it is $49.16.
That's actually a 62% increase. In sharp contrast, the S%P 500 is a mere 15% off its March 9th bottom.
I was not a believer in a long-term commodity based stock market rally in 2004. I'm not a believer now. We may indeed have an impressive stock market rally from here, but I doubt very much that it will usher in a new permanent round of prosperity.
There is just too much money floating around out there in the hands of the uber rich and at least some of it will be willing to chase oil again. The oil market is way too small to absorb it, just like it was last time.
Allow me to do some "crude" back of envelope calculations to show you what I mean.
Petroleum Basic Statistics
U.S. Crude Oil Imports from OPEC: 5,980,000 barrels/day
At $50 a barrel, that's $300 million per day.
In theory, a $700 billion stimulus plan could therefore pay for 6 1/2 years of imported OPEC oil. In practice, the price of oil would rise exponentially as the money was spent though. Too bad. Free oil for every American for 6 1/2 years would have been one heck of a stimulus.
Want to guess how many years of imported OPEC oil the $50 trillion that was lost during this global recession could have bought us? Try 456 years. Once again, that's just in theory though. I'm fairly confident that we couldn't have bought 456 years worth of imported OPEC oil at any price.
That's how small the oil market is when billions and/or trillions of US dollars attempt to compete with it. That's why I am comfortable being a long-term stagflationist. And when I say comfortable, I actually mean terrified. It's almost like we are letting the terrorists win.
September 19, 2008
Since 2001, our economy has faced a recession, the bursting of the dotcom bubble, major corporate scandals, an unprecedented attack on our homeland, a global war on terror, a series of devastating natural disasters. Our economy has weathered every one of these challenges and still managed to grow.
Update:
On September 19, 2008 the S&P 500 closed at 1,255.08. After the past week's impressive rally, it closed today at 778.12. That's a 38% loss.
Stag,
ReplyDeleteI read one of Dent's books several years ago. His phrase "demographics are destiny" stuck with me and made a lot of sense.
That said, I totally disagreed with many of his conclusions and prognostications. IIRC, Dent was forecasting a huge boom in equities (Dow 20,000) right now as boomers hit their peak CONsumption years. I didn't see that as valuations were already stretched and we had recently lived through a stock market bubble. I also felt too many had/were living beyond their means.
I don't even accept that the housing boom was a result of the baby busters although that probably was a CONtributing factor. More than anything else, I think the housing bubble was fad spurred on by foolish monetary policy. A monetary policy that needs to ensure massive credit growth. Basically any growth at all as long as it feeds the exponential credit growth monster.
Peak oil & peak resources are spooky! And they seem to run totally counter to the exponential credit growth model.
Something will have to give.
mab,
ReplyDeleteThat said, I totally disagreed with many of his conclusions and prognostications.
That figures.
I'm reminded of the deflationary Prechter telling us to buy short-term treasuries. A true deflationist would have made money off of falling long-term bond yields.
I'm reminded of Warren Buffett telling us of the housing bubble. So what did he do? He bought banks and therefore exposure to the housing bubble.
Seeing a problem is apparently just half of the battle.
Something will have to give.
Our governor has an interesting solution. It's a someone will have to give theory. She wishes to tax college students. Ah yes, I remember being a college student. I was flush with cash (NOT!).
Wash. Gov. Gregoire open to college tuition surcharge as budget deficit worsens
http://seattletimes.nwsource.com/html/education/2008875044_xgrgregoireeducation.html
Gov. Chris Gregoire says she's interested in a temporary tuition "surcharge" that could help public universities deal with big budget cuts.
It isn't a tax of course. It is a surcharge.
Stag,
ReplyDeleteIt's a someone will have to give theory
I think there is a better way. We have to recognize the reality that nobody wants to give these days. Heck, even the unborn are tapped out.
Here's my plan and it is a true win-win!
The Government borrows even more money to bailout financial companies. The extra government borrowing will provide the credit growth/stimulus our eCONomy desperately needs. We then force bankers to pay themselves huge bonuses. Really huge. Way more than they ever bargained for. A win for the bankers!
Now pay attention, this next part is critical. We then have CONgress pass a law that taxes financial bonuses at 110%. Bankers will have to borrow money to pay the taxes on their bonuses causing even more credit growth/stimulus. A win for the tax payer!
Rinse & repeat. It's a perpetual prosperity miracle! All on paper too. No sweat equity required.
mab,
ReplyDeleteNow pay attention, this next part is critical.
Ever get the feeling that you are disarming a bomb with multiple booby-traps?
The last part was critical. The part before that was critical. The present part is critical. The future part is critical.
Critical Hit
http://en.wikipedia.org/wiki/Critical_hit
The negative counterpart of the critical hit is variously known as the critical miss, critical fumble, or critical failure. The concept is less frequently borrowed than that of critical hits.
There's that borrowed word again. Go figure.