Friday, November 14, 2014

Quantifying The Stimulative Benefits of The Oil Price Decline (SPY; XLE)

Easily the most important story in global macro, the related strength of the dollar is a distant second.
The stimulus effects are the reason we have a prima facie (but only on its face) paradoxical call for a higher S&P 500 (SPY) while at the same time looking for dramatic underperformance from a major sector (XLE)
From Gavyn Davies blog at the Financial Times:

Large global benefits from the 2014 oil shock 

The most significant economic shock in the global economy so far in 2014 has been the drop of more than 25 per cent in spot oil prices since the end of June. Since this shock is attributed by most energy analysts to an increase in oil supply, and not to a decline in global oil demand, this should have led to a significant decline in near-term world inflation forecasts, and to upgrades in global economic growth forecasts.

The disinflationary effects are uncontroversial. Lower oil prices have obvious direct and indirect effects on consumer prices. But the boost to growth is more debatable, since lower oil prices involve a redistribution of income from oil producers to oil consumers. Why should this reallocation of resources lead to a rise in real gross domestic product?

It is because of time lags. Oil consumers, which are mainly households, have seen their real incomes rise, perhaps permanently, and they are assumed to allocate part of this gain quite quickly to increased real expenditure on other goods and services. Oil producers, on the other hand, are mainly rich governments and corporates, and they may take much longer to reduce their expenditure in line with their lower real incomes.

That, anyway, is what economic models tend to assume when oil prices decline for supply-related reasons. However, as Bruce Kasman of JPMorgan Chase pointed out to me in a conversation yesterday, this is not what has actually happened since the 2014 oil shock occurred. Inflation forecasts have been revised down as expected, but GDP growth projections have also been revised downwards, not upwards. What is this telling us?...MUCH MORE
HT: FT Alphaville's Further Reading post

Previously on the This is a Big Deal channel:

Oct. 16
Citigroup Sees $1.1 Trillion Stimulus From Oil Plunge
Oct. 17
Three Bullish Macro Charts
The single most bullish thing we posted this week...
Oct. 27
Oil Shows Some Resilience (today)
At the moment oil is probably the most important story in the global economy.
The stimulative effects of lower oil prices are immense, maybe two trillion dollars, and more important than anything the central bankers are up to, for now anyway.
(QE ends Wednesday)

After trading down to a better-than-two-year-low $79.44 the front future WTI is now only down 26 cents from today's settle, at $80.74. We're going lower but you may see a bit of a short squeeze this week....
Oct. 28
More Goldman on Oil and a Correction on the Stimulative Effects of Oil Price Declines
Oct. 30
Oil: There's Bearish and There's Betting On $50/Barrel Bearish
Nov. 1
Dollar's Next Leg Up
Second only to declining oil prices* in importance to the current global-macro playing field is the strength of the dollar....