Yesterday, I wrote the about the Oil Wars and convey how the Grand Strategic decision making has locked us into an escalation trap. The news media is simple going along with the shallow narratives being feed to them.
Today, I appreciate the economist Paul Krugman trying to explain what I have been trying to convey. Never has a severe global slowdown been more guaranteed and predictable even while the stock market goes la, la, la, la.
As for the economy, he invokes the 1970s oil shock which this coming shock is on level with. It induced a global recession required to reduce oil demand in an oil constrained world. As for the markets, comments to his article hit on how after COVID started spreading the SP500 still hit a new high. The market was blind.
Today the market not only remains blind but also appears to be propped up a bit with liquidity. You do not get rallies like this one in Bull markets, you get them only in Bear markets. But never before have we seen a Bear market rally surge to a new all-time high and while the world falls apart.
Krugman explains that most economist are modeling the future economy with guesses to oil prices in the future. They are not modeling the physical lack of oil going forward. In his look at the 1970s, the only way demand was brought down to supply was through huge price increases in oil and gas.
It was not just the price increases, but the forced slowdown in the economy from lack of energy to meet the economy’s needs. There was economic destruction.
In Australia today, the rural gas stations have run dry. The last tanker from the gulf reached Europe only last week. There are no follow-on tankers and if the strait opened today, it would take 2 months to reach them. But there are not enough tankers ready to start up the old cycle for months after the strait opens.
And it is not just oil. Japan will run low on aluminum needed to build engines and wheels by July. Forced slowdowns from supply not demand are coming.
So we have a permanent oil deficit about to finally hit the global economy. Some places will be hit hard, some will be okay directly, but not to the follow-on effects.
If the world needs to go on a 15% diet this summer, what price of oil does that require. More than you would think. But the real factor, is what level of economic destruction is required. We will find out.
The US is not fully protected from the global price of oil or the deficit. We do import sour oil needed for some refineries. Diesel prices are the most impacted. But this is about how the global economy impacts the SP500.
Fifty percent of the SP500 revenue are non-US revenue. It is actually a global fund even though we think of it as an American fund. For tech sector, the percent is 70%. I think we are in for the COVID effect where the market wakes up late, but wakes up.
A subscriber asked why my commentary is so different from what they see elsewhere. I think Paul Krugman hit on it partly – no one is looking at the oil shock in the right way. I also think we have a cheerleading media environment whether it be for the stock market or for our wars.
I learned, to my surprise, while working in the pentagon that one goal for public affairs is to keep the American people supportive of our operations and troops. My take is that when the policy decisions are BAD, this is not helpful in the long run. The goal should be an informed, prepared public but that gets in the way of politics.
So yes, my take is very different from the public narrative some times. Very.
My take today, is this current narrative high may be the last for awhile. Unless, as Krugman says, Trump can declare victory while walking away in defeat… and that is not going to happen in my opinion. You can read my last post to understand why the hidden grand strategic battle will not allow it.
Michael Bond
Categories: Perspectives