TIS OIL STOCKS VS. OIL - CHANGE IN TREND?
A reversal back to the upside in oil prices after a failed Doha meeting and an end to the Kuwait oil workers’ strike was an example of new flow going one, pries the other. Believe what you see - prices. Oil should have come down; it did for all of a few hours and then moved higher. What was really striking though, especially early Wednesday morning, was how oil prices started lower, but oil stock barely budged. Then when spot oil moved up during the day, (Wednesday) XLE moved up. In many locations, oil production is falling now, from the U.S. to Nigeria, Iraq, Libya and Venezuela. Unless oil demand begins to fall, the energy stocks are saying prices are headed higher.
Energy Select Sector SPDR ETF (XLE) (1 year) Courtesy of Bloomberg LP Oil’s improvement could be a lower Dollar trade as much as a high demand/lower supply story. However in North America, demand is strong as the summer driving season approaches and refiners have been big buyers. This does not diminish the positive effect of a lower Dollar, but it is a bit puzzling given a softening U.S. economy. I am reminded of the old bromide that the cure for low prices is low prices, so perhaps what we are really seeing is low gasoline prices finally attracting drivers. Disneyland and Motel 6 may have big summers.
Oil above $45 or even stable around $45-$50 helps the high yield bond market, it heals HYG and U.S. energy loan losses are reduced. In my view, the world economy has 3-4 years of slow growth or recession dead ahead. The effectiveness of monetary policy in reflating economies has about run its course. This is the probably the year of highest asset prices, for what may turn out to be 3-4 years. The depths of the Kondratieff winter should come in 2019-2020. Deflationary forces are still present around the world, while tax rates are high and room for fiscal expansions limited. As currency devaluations fail to reflate world economies, the next step will be tariffs and trade protection. We already see this in the U.S. elections where the Donald threatened to hit Chinese goods with 45% tariffs and now even the Bern and Hillary are talking about bringing jobs back to America. Now that the field of viable Presidential candidates has been reduced to 2-3 people, it is interesting to see all of them talking about jobs, the economy, pocket book issues - as usual. The electability question, I think, will be this. Who is the candidate most likely to address those issues? Who has the credibility which will bring out voters in their favor, who see their economic well-being as the number one issue?
As I traveled around Europe over the past month, it has been noticeable how negative so many people are on politicians. From France where Monsieur Hollande intends to run again with a 12% approval rating (against Sarkozy who Hollande beat), to left wingers in the UK who want to keep nuclear submarines yet plug their missile silos, to Madame Merkel who arbitrarily turned Germany into a safe haven for refugees, the complaints go on and on. It seems like pretty much everyone has decided that with the exception of Putin, Europe’s leaders are ineffective.
And what they say about the Donald, mama mia! Hillary gets higher marks, for reasons I do not follow, while in the U.S., Mrs. Clinton has unfavorable ratings over 50%. Negative rates are viewed as ineffective if not counter-productive. As one Swiss banker said to me, negative rates did two things. They forced people to save more. And because there is no risk free rate of return, risk appetites have been pulled in - forcing volatility lower. European friends lay responsibility on central banks. I am starting to think the best thing central banks could do is raise rates, ride through the turbulence and partner that with real economic growth policies pre-arranged with governments.
Source: Bloomberg Data