Wall Street Rallies Around Rebounding Oil Prices Are You Kidding Me ?

This Friday’s shoot-the-shit topic is an open discussion on the recent media assessment that this week’s stock rally was fueled by a Republican sweep in the midterm elections AND “Rebounding Oil Prices.” So, let’s take a look at part 2 of that statement to see if it even makes sense.

Rebounding oil prices mean that oil prices are heading back up. Because of the relative inelasticity of fuel prices, it means higher costs for manufacturers, distributors and ultimately the consumer who is still wondering what recovery the media and politicians are talking about.

Higher oil prices mean the supply side of the economy has to absorb higher costs. If they are in a competitive business sector, they either have to accept smaller profits or increase prices, which will hit sales. On the consumer side, higher fuel costs especially with old man winter on the doorstep, means less disposable income, which translates to lower capital goods purchases and lower retail sales. Big ticket items, even with 0% interest rates will take a back seat. Prospects for employment are diminished.

So, who benefits in an economy with rising oil prices? Speculators, derivative traders and corporations, who are finding that it is better to apply idle cash or borrowed money, at record low rates, to roll into the stock market in lieu of adding plant and equipment to increase production capacity or achieve efficiencies; after all, they can always have their widget made in China.

I’ve taken the liberty to add a couple of interesting data sets to this discussion. The first is GDP data from 2000 to 2014 (it’s available as far back as 1950) and its trend line. You’ll note that it has a downward slope. Downward sloping GDP trends are an indication that the domestic economy is contracting and not expanding.

Added for clarity: When I suggested the economy was contracting, it was a forward looking statement. The data I presented shows that GDP is growing at a decreasing rate. If the trend is not reversed the economy will, over the longer term, show contraction in real terms (meaning net of inflation).

The second chart is the Balance of Trade data from 2000 to 2014 with its corresponding trend line. Note that it too has a downward slope. This is an indication that we are importing more than we are exporting at an increasing rate.

united-states-gdp-growth

united-states-balance-of-trade

The data presented should prompt you to ask the question… Why are we seeing a stock market at over 17500? The reason is that huge piles of cash (some of it borrowed at near zero interest rates) have nothing to do, so it moves into the market driving stock prices higher. If you are a Wall Streeter, you’re basking in bonuses and Mercedes Benz. The sad reality in all of this is that there is no real economic support for these prices other than the sheer demand for stocks. Stock prices are rising simply because there is nothing else for money to do. You’ll here a lot of B.S. about price earnings ratios and blah, blah, blah; however, the fact remains that there is no real (real is another way of saying economic) support for these levels. When someone is telling you corporate earnings are strong, ask where the earnings are coming from. Is it outsourcing, restructuring and cost cutting, or are they coming from strong sales. You can then draw a meaningful conclusion. So, if you think the stock market rally is an indicator of the strength of the economy, you may want rethink your position.

The submarine community has a famous saying, and I quote: “What comes up must come down, but what goes down does not necessarily have to come back up.”

The new Republican majority in Congress needs to move the recovery out of Wall Street and into Main Street. There are a number of ways in which that can be achieved without adding to systemic risk or hampering the flow of capital.  In the meantime lets not create any more monsters through consolidations – like the banking sector. Let’s put monetary and fiscal policies in place that increase competition and domestic manufacturing. The best way to deal with the national debt is with a growing GDP. They have two years to get it right.

MITCH McCONNELL I BELIEVE IN YOU!

Let us know what you think?

BTW – I was asked about shoot-the-shit rules. A good shoot-the-shit has no rules, you don’t have to support your comments or provide sources. You can switch subjects, express opinions or call somebody a moron. Anything goes!

HAVE A GREAT WEEKEND EVERYONE!

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