Editor's Note: Originally published January 11, 2016 - madhedgefundtrader.com
After the market closes every night, I usually don a 60 pound backpack and climb the 2,000 foot mountain in my back yard.
To pass the time, I listen to audio books on financial and historical topics, about 200 a year (I've really got President Grover Cleveland nailed!). That's if the howling packs of coyotes don't bother me too much.
I also engage in mental calisthenics, engaging in complex mathematical calculations. How many grains of sand would you have to pile up to reach from the earth to the moon? How many matchsticks to circle the earth?
For last night's exercise, I decided to quantify the impact of last year's oil price crash on the global economy.
The world is currently consuming about 92 million barrels a day of Texas tea, or 33.6 billion barrels a year. In May, 2014 at the $107.50 high, that much oil cost $3.6 trillion. At today's $32 intraday low you could buy that quantity of oil for a bargain $1 trillion.
Buy a barrel of crude, and you get three for free!
This means that $2.6 trillion has suddenly been taken out of the pockets of oil producers, and put into the pockets of oil consumers, i.e. you and me. Over the medium term, this is fantastic news for oil consumers. But for the short term, things could get very scary.
$2.6 trillion is a lot of money. If you had that amount of hundred dollar bills, it would rise to 250 million inches, 21 million feet, or 3,976 miles, or 1.2% of the way to the moon (another mental exercise). Tip this pile on its side, and you'd have a distance nearly equal to a round trip from San Francisco to New York.
The global financial system cannot move this amount of money around on short notice without causing some pretty severe disruptions. Expect a lot of bodies to float to the surface in 2016.
For a start, there is suddenly a lot less demand for dollars with which to buy oil. This has triggered short covering rallies in the long beleaguered Japanese Yen (NYSEARCA:FXY) and the Euro (NYSEARCA:FXE), which are just now backing off of long downtrends.
The fundamentals for these currencies are still dire. But the short-term trend now appears to be an upward one. The yen is tickling a one-year high against the buck as we speak.
The US Federal Reserve certainly sees the oil crash as an enormously deflationary event. The use of energy is so widespread that it feeds into the cost of everything. That firmly takes the chance of any interest rate rise off the table for the rest of 2016. The Treasury bond market (NASDAQ:TLT) has figured this out and launched on a monster rally, as have muni bonds (NYSEARCA:MUB).
Traders are also afraid that the disinflationary disease will spread, so they have been taking down the price of virtually all other hard commodities as well, like coal (NYSEARCA:KOL), iron ore (NYSE:BHP), and copper (NASDAQ:CU). For more depth on this, see my piece on "The End of the Commodity Super Cycle" by clicking here.
The precipitous fall in energy investments everywhere will be felt principally in the 15 US states involved in energy production (Texas, Oklahoma, Louisiana, North Dakota. Etc.). So, the consumers in the other 35 states should be thrilled.
However, the plunge in energy stocks is getting so severe, that it is dragging down everything else with it. ALL shares are effectively oil shares right now. In fact, all asset classes are now moving tic for tic with the price of oil. That effectively makes all of you oil traders.
Throw on top of that the systemic risk presented by the ongoing collapse of the Russian economy. The Ruble has now fallen a staggering 70% in 18 months, and there is panic buying of everything going on in Moscow stores.
The means that the dollar denominated debt owed by local firms has just risen by 300%. Any foreign banks holding this debt are now probably regretting ever watching the film, Dr. Zhivago.
Russian interest rates there were just skyrocketed. The Russian stock market (NYSEARCA:RSX) is the world's worst performing bourse. How do you spell "depression" in the Cyrillic alphabet?
And guess what the new Russian currency is?
IPhone 6.0's, of which Apple is now totally sold out in Alexander Putin's domain!
Thankfully, this is more of a European, than an American problem. But nobody likes systemic risks, especially going into New Year trading. It's a classic case of being careful what you wish for.
Of the $2.6 trillion today, about $650 billion is shifting between American pockets. That amounts to a hefty 3.3% of GDP. Tell me this won't become a big political issue in the 2016 presidential election.
Money spent on oil is burned. However, money spent by newly enriched consumers has a multiplier effect. Spend a dollar at Walmart, and the company has to hire more workers, who then have more money to spend, and so on.
So a shifting of funds of this magnitude will probably add 1.5% to U.S. economic growth this year.
Ultimately, cheap energy as far as the eye can see is a key element of my "Golden Age" scenario for the 2020's (click here for "Get Ready for the Coming Golden Age").
But you may have to get there by riding a roller coaster first.
Oil at $32?
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