Brennaman’s Four Points for the Week

1.       Geopolitics of Oil – Is the Middle East Relevant? – As the price of oil continues to drop and the global glut continues to build it is really no surprise that OPEC did not cut production last month in an effort to protect their profit margins.  As the resurgence of oil production in North America continues unabated and Russian oil is flowing despite the Western sanctions, the large producers of oil in the Middle East fear one thing (among many) – not being able to dictate the terms of the production and price of oil.  The disdain for the potential loss of market share drove Saudi Arabia to maintain the pressure on the members of OPEC to keep producing oil even as the price of oil falls below their breakeven point.  The last thing they want to see is the U.S. lifting the ban on the export of domestic oil.  It is important to remember these nations export very little in terms of their economic wellbeing other than oil.  Without the outsized oil revenues, Saudi Arabia has to dig deep into fiscal reserves to make payments to their citizens to maintain the status quo.  Fortunately for them they have the means to do this.  Not so with Venezuela, Iran and the majority of the members of OPEC.  The pain will run deep and will linger far after the time when oil resumes its elevated perch, which is inevitable.

2.       Economic Growth – The U.S. Economy Continues to Improve – The U.S growth is building slowly despite the effects of the global slowdown.  Our growth may well be the solution to the global growth problem at hand but it will take more time than usual (normal?).  The stronger U.S. dollar and the budding recovery here in the U.S. have contributed to the increase in new jobs at a rate greater than at any time since 1999.  We re observing evidence of wage pressures increasing that hopefully will translate in an upward move in nominal wages.  These developments along with lower energy prices could translate into better consumer spending this holiday season and well into the New Year.  Something to reflect on is the positive impact of lower gasoline prices.  For every one cent decline ($.01) in the price of gasoline there is a corresponding increase of money available in the economy.  What does this look like on an annualized basis? – A staggering $1 Billion dollars for every cent in decline of the price of gasoline!  In the last 52 weeks the average price of gasoline has declined $.26 (AAA – 11/10/14) which translates to $26 Billion to stimulate the economy.  This number alone is stimulative to our economy and is helping to fuel the recovery.  Ironically, the lower gasoline prices do not help us in terms of federal and state taxes as they are a fixed rate per gallon.

3.       Russia– Putin No Longer Hiding Involvement in Ukraine – As the Russian economy slowly grinds to a halt, Vladimir Putin is as bellicose as usual; trumpeting the old refrain that the tribulations of Mother Russia are the fault of the U.S. led effort to dominate Russia economically and militarily.  This plays well to the populace at home as they perceive all threats from without as something to solidify national resolve.  This for a people who have endured oppressive governments for well over 500 years.  Hardship to the Russian people is to be expected and deviation from this is suspect. So it is no surprise that the heavy handed approach by Putin is met with a certain degree of acceptance.  Especially when the message is so well orchestrated and controlled by the oligarchs running the country.  The mess in Eastern Ukraine is approaching a critical point as the winter is now clearly settled in and the basic resources and services we take for granted (ample food supplies, electricity, natural gas, running water, and sewage) are nearly nonexistent.  Russian officers are mediating a new ceasefire and a new demarcation line in an effort to quell the virtually constant fighting since the September ceasefire agreement reached in Minsk.  All of this is happening as Ukraine is trying to secure financial guarantees and additional loans from the West (European Union and the G-7) to meet fiscal obligations, provide for growth in the country and keep the lights on.  Meanwhile Putin uses this situation to further position himself and Russia in a favorable light back home where the ideas presented by him have a deep resonance with the people.  The losers in this shell game are foremost the populace in Eastern Ukraine and the beguiled population of Russia.

4.       Economic Uncertainty – A Clearer Picture Emerges – Unemployment remains unchanged at 5.8% but wages have increased a little.  Combined increasing consumer demand (the breadth and depth remains to be seen) has resulted focus in the heretofore quiet topic of the Federal Reserve Open Market Committee (FOMC) and the much anticipated rise in the Fed Funds rate.  The rates have been near zero for nearly six years (February 2009).  The consensus on the street is that the FOMC will raise rates sometime in the second half of 2015.  But the idea of a date certain is not reinforced by the standards that the FOMC has established which consist of inflation greater than 2% and unemployment lower than it is now, perhaps 5.5%.  Still, GDP growth this year will likely be around 2.2% and many economists are forecasting growth next year to be in the 3-3.2% range – close to the historical long run rate of 3.3% (U.S. Bureau of Economic Analysis 1914 – 2014).  But is that rate sustainable?  The FOMC does not want a repeat of the 1937 fiasco when thy raised rates during the nascent recovery only to plunge the economy back into a recession, further prolonging the recovery well into the world war.  Chairperson Yellen, like her predecessor Bernanke, is a student of history and this possibility is not lost her and the Fed board of governors.

“Can any of us even imagine, after Pearl Harbor, President Roosevelt suggesting we negotiate a resolution or that we could simply prosecute those involved?  Of course it is unimaginable. We are right to be in the Middle East, and we are right to treat this as the war it is.”  U.S. Congressperson Marsha Blackburn from Tennessee

Have a good week and seek out a World War II veteran and tell him we remember Pearl Harbor and the subsequent sacrifices.

Steve