Brennaman’s Four Points for the Week
1. Energy –
The Best of Times, The Worst of Times – No surprise the Keystone XL pipeline
effort failed in the current political atmosphere but at least it came to a
vote. Perhaps in January. Meanwhile crude oil prices have reached the
lowest price per barrel since September 2009 and it appears that $60 per barrel
is just around the corner as the global oil glut continues. The Organization of the Petroleum Exporting
Countries (OPEC) voted last week to maintain current levels of production which
in turn sent crude oil prices racing toward the bottom. Many of the countries need crude to sell well
north of $85 to $100 to support their internal; operations but they also do not
want to let their market share slip away.
The U.S. is now the 3rd leading producer of oil in the world and could
be self-sufficient by 2025 according to U.S. government estimates. And all of this with little or no help from
the U.S. government. Free enterprise
hard at work. Lower oil prices have
translated into lower prices on refined products such as gasoline, diesel and
aviation fuel. Of course lower prices to
the consumer means lower profits for the companies in the oil patch. This in turn has pounded the companies in the
energy sector in terms of share prices.
The sector is the poorest performing sector in the S&P 500 as well
as other indices. The upside of the
lower oil prices is the savings across the board will help “fuel” the economic
recovery from the depths of the 2007-08 recession. And yes Virginia there is a Santa Claus – he
is lower gasoline prices which are like a tax break so consumers can spend – a
true upside.
2. Economic
Growth – Global Slowdown Materializing – Signs are currently developing
pointing to a global slowdown. While not
a recession, the slower growth and the attendant signals may be harbinger of
things to come. The European Union (EU),
Russia, China, Japan and now India are demonstrating signs of slower
growth. In the case of Russia that would
be a negative number (Western sanctions and a corrupt economic system). While the U.S. economy is recovering, demand
for goods here and abroad is still stagnant with little upward mobility in
consumer prices and thus lower profits for companies; then lower tax revenues
for countries, lower salaries; well - you get the picture. The EU is afraid of deflation but central
banks are programed to fight inflation and to stimulate growth. Fighting deflation is a not a tool in the
collective tool kit of central banks.
Japan is seeing slower price growth and dwindling demand mostly because
of population issues. China’s growth,
while still in the 7+% range, is in danger of slipping below the PRC government
target of 7%. To them this would be
recessionary. This is all occurring
despite the lower cost of energy (natural gas and crude). The stronger dollar (oil is priced in the
U.S. Dollar) takes away some of the benefit of lower oil prices but in reality
the biggest problem is slowing demand.
Is the U.S economic recovery strong enough to propel (or pull) the
global economic community to better times?
3. Ukraine –
Closer European Ties Needed Now – Domestic events here in the U.S have pushed
the Ukraine situation deep into the papers and even further from the personal
psyche of Americans. But the situation
remains unsolved and is not going away.
The Kiev government is set to receive another installment loan from the
EU to the tune of $625 Million on top of the $1.2 Billion already allocated to
the struggling democracy. The loans are
intended to help shore up the economy so Ukraine can get on more solid footing
and develop closer ties to the west and away from the Russian sphere of
influence. This is tough order of
business considering the country was dependent on Russia for nearly all export
revenue prior to the coup d’état earlier this year and the reestablishment of a
democratic government. Also it is
important to note that Ukraine has no modern experience in a free market
environment. Their experience is limited
to the 20+ years since they were cut free from the Soviet Union after the
dismantling began in 1991. Time will
tell but this loan is vital to the future of Ukraine as it will allow Ukraine
to develop and strengthen the free market culture necessary to survive and
thrive in the global economy. Ukraine
needs the support of the West.
4. Economic
Uncertainty – Political Uncertainty – Strong economies make for strong
democracies or at least strong governments.
Hungry and unemployed citizens with nothing but time on their hands are
a threat to government and society. Wars
have been fought over the ages for any number of instigating events but a
common denominator has been the need for economic stability and the benefits
derived from the stability therein gained.
A stable economic process and the results derived from the exercise of
free market activities places a high cost on global war for those with viable
economies. But those political entities
without the economic strength are ready candidates for seeking resources to
facilitate their economic growth through aggressive behavior. So economically developed nations need to be
on the lookout for those nations living on the precipice of economic
dysfunction lest they be caught up in a conflict of the haves fighting off the
have not’s.
“Too often in recent history liberal governments have been
wrecked on rocks of loose fiscal policy” Franklin D. Roosevelt
Have a good week and recovery from Black Friday activities.
Steve
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