a blog about investing
Faced with slowing economies and sluggish employment, more and more countries throughout the world are devaluing their currencies, slashing interest rates and stimulating growth wherever they can. That should be a recipe for further global growth in the years to come. read more…
Greece is once again on center stage as the world looks on, wondering if this time the country’s finances will finally implode. It is a play we’ve seen before and its outcome fairly predictable. read more…
Non-farm payroll employment increased by 257,000 jobs in January and the gains for the preceding two months were revised upward as well. Even better news was hourly wages that jumped 0.5% in January to $24.75 after declining in December. That’s the biggest gain in six years and bodes well for the economy overall.
Wall Street has been debating just how fast or slow the U.S. economy is growing for months now. The faster the growth, the more likely the Fed will raise interest rates. Why is this so important?
One school of thought says interest rate hikes are ‘bad” for the stock market. In times past, when rates rose the stock market has sold off, sometimes a lot, other times not so much. Since June is supposedly the target date for a rate hike, and markets usually discount such events by six months or more, we are in ground zero–if you believe in this scenario.
Weighing in on the other side of this argument are those who believe the Fed won’t raise rates for a variety of reasons. Number one, the U.S. economy is not as strong as many think it is (thus the debate over every data point). Even if growth in America does grow a bit more, it won’t be enough to pull the rest of the world out of the doldrums. As proof, they point to the decline in oil prices.
In slow or potential recessionary economic climates, the demand for oil dries up as fewer goods and services are demanded. Most often the decline in the price of oil almost always heralds a slowing of the economy, not only here, but worldwide. In that kind of environment, the Fed would be crazy to hike rates. Some say they should actually restart the QE program before it is too late. No wonder the markets are as volatile as they are given these diametrically opposing views.
Which view is accurate, or are they both wrong? Clearly, the energy issue may have much more to do with the explosion of new energy sources brought on by breakthroughs in technology over the last decade. Weakening energy demand may not be the case at all. It may simply be that this new supply has overwhelmed demand in the short term and price declines are the adjustment vehicle to once again bring the oil market into equilibrium.
There is no question economic growth is slowing around the world, however, various governments are doing their utmost to stimulate their economies as the U.S. has done over the past several years. Their efforts should bear fruit if we use our own QE programs as a guide.
One might wonder that the fear of the unknown, of change, may be at the bottom of these issues. We have been in a low to non-existent interest rate environment for so long in this country that even a small uptick in rates makes us uncomfortable. All you need to do is look back in history prior to the financial crisis to understand that rising interest rates in a growing economy has actually been a good thing for stocks.
In any case, the markets this week have actually turned positive for the year. The oil price was the trigger for three straight days of one percent or more in gains. Unfortunately that means that oil is still the tail that is wagging this dog. I have no idea whether we actually have seen the “bottom” in oil prices, but if we have then we can expect markets to continue higher from here.
Last weekend Japan held “snap” elections, which gave Prime Minister Shinzo Abe the mandate to continue his pro-growth economic policies. No one outside Japan seemed to care. The Nikkei stock market index fell 1.6% and traders moved on. That may prove to be a big mistake. read more…
Just three weeks to go before the end of the year, and stock markets should be celebrating. Instead, equity markets have been down as traders become increasingly spooked by the decline in oil prices. Granted, financial markets sometimes get it wrong, but the present atmosphere of fear is one for the books. read more…
The Ukraine had been the topic on everyone’s lips for over six months. Today, nary a word is written about Russian’s plan to annex that nation. You can thank declining oil prices for that.
While most of the west rejoices over the recent precipitous drop in the price of oil, the story is quite different for the largest producer of fossil fuel energy, Mother Russia. That’s right, Russia, and not Saudi Arabia, leads the world in energy production. As such, Russia depends on energy for 16% percent of its gross domestic product, 52% of total Federal revenues and 70% of all exports. And that was in 2012. Since then the numbers are even higher.
As the price of energy continues to decline, so does the Russian currency, the Ruble. It has dropped by 26% in the last year and just today fell another 1.3%. In the first half of this year alone the Russian economy contracted by over 10% and that was before the brunt of the oil decline occurred. Russian officials estimated they will lose $90-100 billion a year based on oil’s decline.
Officially, the Russian Economic Ministry cut their forecast for GDP in 2015 from 1.2% to -0.8. The Russian people are going to feel that bite with real incomes falling by 2.8%. This will be the country’s first recession since 2009. At the same time, the inflation rate is expected to rise from 7.5% to 9%. In an effort to combat rising inflation their central bank is hiking interest rates at the same time to almost 10.5%, further hurting economic growth.
Earlier in the year, the prospects for the Russian economy were already looking fairly anemic, thanks to Putin’s adventurism in Crimea. In retaliation, U.S. and European sanctions have now begun to bite. By Russian forecasts, those sanctions will cost the country $40 billion this year. They have also effectively closed off global capital markets to Russian banks and corporations. As a result, investment has dropped off a cliff as uncertainty, combined with a lack of security, has devastated corporate Russia.
On December 4th, Putin addressed his government ministers and parliament with a mix of sophisticated economic plans to liberalize the economy and good old fashioned nationalism that would have made Hitler proud. Of course, he blamed the west for everything from Russia’s current economic woes to annexing Crimea and Ukraine.
It was interesting that he barely mentioned the continuing war in Eastern Ukraine. It appears that the declining oil price has damaged Putin’s plans far more than the economic sanctions instituted by the west. Was it a fortuitous coincidence that energy prices started to decline this year just as Vladimir Putin began to marshal his forces for a move into Ukraine?
Readers should remember that the Kingdom of Saudi Arabia, which is getting the blame for not supporting oil prices, is a key U.S. ally. What better way to hamstring Russian adventurism than to hit them where it really hurts via oil? Notice too, that both the administration and congress has been silent about this recent energy rout, although theoretically, declining oil prices hurts our burgeoning shale industry and American efforts at energy independence.
I say let the oil price fall until it doesn’t. Let the markets determine the fair value of energy and hopefully, in the meantime, bankrupt the Russian bear.
American investors tend to focus almost solely on their own markets. While every nuance of each day’s developments is debated ad infinitum, short shrift is usually given to what is happening overseas. For example, can you tell me how the Chinese stock market has fared this week? read more…
The disappointing 11% decline in brick and mortar retail sales on Black Friday took Wall Street and Corporate America by surprise. Excuses vary from the holiday shopping fad has run its course, to people just wanted to be with their families on Thanksgiving. Don’t believe it. read more…
This year while shoppers scroll through the Internet, jockey for position at the sales counter, or wait in line hoping to be one of the first 100 through the door, the really big sale is staring us in the face. And this one requires no money down. read more…
This week the stock market made a series of minor new highs. But China’s surprise move to lower interest rates caused global markets to surge on Friday. read more…