You are really, really old if you can remember the TV show entitled The Millionaire. It ran from 1955 to 1960 and illustrated possible effects on normal, unsuspecting people when they were suddenly given a million dollars, which was an unimaginably huge amount of money at the time. Some people quit their jobs and therefore lost their identity. Some people watched their family spin apart as they all had strong ideas what should happen to the money. Some people became jerks, alienating those who loved them. Some found ingenious ways to just give away their money.
Right now, the stock market is convulsing over the sudden, dramatic 40% drop in oil. It reminds me of the old TV show -- adjusting to a good thing can be quite painful. Make no mistake: a drop in the price of oil is good for the economy in the long run. However, we must adjust to it in the short run. The market angst is whether the drop is due to oversupply or to falling demand, which would indicate weakening economic growth worldwide. Oversupply is a good problem. Weakening economic growth would be a bad problem.
Another short run adjustment is the damage to fracking industry in the United States. This has been such a growth industry and has really helped lift the economy out of recession. It has also brought us closer to energy independence than we have been in my lifetime. I hope we will protect that industry, as well as minimize any environmental damage. Related to this, the growth in this industry allowed many of the smaller companies to issue high-yield or "junk" bonds, which powers the portfolio income for many income-needy investors. The value of these bonds have dropped rather dramatically. (The value of MLPs have dropped but not as much.) Banks with heavy lending exposure to the energy sector have also dropped in value.
Another complicated adjustment is with international relations. When Russia confiscated Crimea and invaded Ukraine, it did not know that the price of its primary source of hard currency was about to drop 40%. China did not know that its most expensive import would be blessed with the gift of a 40% decreased cost. The already-shaky oil-exporter Venezuela is now circling-the-drain. The list of affected international relations is long and complex. (Maybe, the leaders of all these countries could star in a new reality show called The Trillionaire?)
But, all this assumes the price of oil will stay low. Over the last seventeen years, oil has traded within a channel. Take a look at this graph:
Right now, the stock market is convulsing over the sudden, dramatic 40% drop in oil. It reminds me of the old TV show -- adjusting to a good thing can be quite painful. Make no mistake: a drop in the price of oil is good for the economy in the long run. However, we must adjust to it in the short run. The market angst is whether the drop is due to oversupply or to falling demand, which would indicate weakening economic growth worldwide. Oversupply is a good problem. Weakening economic growth would be a bad problem.
Another short run adjustment is the damage to fracking industry in the United States. This has been such a growth industry and has really helped lift the economy out of recession. It has also brought us closer to energy independence than we have been in my lifetime. I hope we will protect that industry, as well as minimize any environmental damage. Related to this, the growth in this industry allowed many of the smaller companies to issue high-yield or "junk" bonds, which powers the portfolio income for many income-needy investors. The value of these bonds have dropped rather dramatically. (The value of MLPs have dropped but not as much.) Banks with heavy lending exposure to the energy sector have also dropped in value.
Another complicated adjustment is with international relations. When Russia confiscated Crimea and invaded Ukraine, it did not know that the price of its primary source of hard currency was about to drop 40%. China did not know that its most expensive import would be blessed with the gift of a 40% decreased cost. The already-shaky oil-exporter Venezuela is now circling-the-drain. The list of affected international relations is long and complex. (Maybe, the leaders of all these countries could star in a new reality show called The Trillionaire?)
But, all this assumes the price of oil will stay low. Over the last seventeen years, oil has traded within a channel. Take a look at this graph:
Now, it appears that oil is close to rebounding, which will also upset the stock market. Some argue that this drop in oil price is a "black-swan" which unexpectedly resets all relationships, making this graph of past relationships meaningless.
A little stability would be a big blessing, don't you think?
