Submitted by David Stockman via Contra Corner blog [12],
The buy-the-dip crowd went on a rampage last Thursday, lifting the Dow by 300 points in the first hour of trading. So doing, it got the stock averages back into the green for 2015—-thereby making short shrift of another 4-5% “dip” at the turn of the year.
But don’t think we are off to the races once again. This year may be different, finally
Indeed, this time the Wall Street touts have got the narrative so dead wrong that the day-traders and robo machines who track them are likely to be smacked-down on the dips over and over—– until there are no more dips left, only an honest-to-goodness plunge.
The false narrative is an old standby that is usually revived when worrisome clouds form on the global horizon. Namely, that the US economy has “decoupled” from the troubles brewing abroad; and that this time the collapse of crude oil amounts to a giant “tax cut” that will send US consumers into a frenzy of new spending, thereby fueling a surge of hiring, income and growth.
Nice theory—but it’s not going to happen. In the first place, the plunge in oil prices is not a “tax cut” and its doesn’t put a dime into the pockets of any consumer. That whole notion is just one more example of ritual incantation—–a baseless repetitive refrain that flows from Keynesian doctrine and Wall Street bullhorns.
What will happen is that total “spending” in the US economy will be reallocated, not increased. And now that net petroleum imports have dropped to a 40 year low, the math is pretty straight forward; and its not indicative of a windfall boon to the domestic economy, at all.
At the present time, total US petroleum product consumption—including gasoline, heating oil, jet fuel, chemical feedstocks and the rest of the refinery slate—is about 19 million barrels/day or just about 7 billion barrels annually. Assuming we get an average $60 per barrel price reduction in 2015—from the previous $100 trend to about $40—-the indicated annualized “savings” is about $420 billion.
Yes, that’s something. It amounts to about 2.3% of GDP and 3.5% of personal consumption expenditures (PCE). But net imports in the most recent month (November) were only 5.1 million bbls/day, meaning that fully 14 million bbls/day was accounted for by domestic crude oil, condensates, NGLs and refinery gains. So the domestic revenue hit at $60 per barrel will amount to a thumping $300 billion.
Now the net gain to the US economy of the $120 billion difference is nothing to sneeze at—even if it does amount to only 1% of the current $12 trillion of PCE. Yet even that is not all that meets the eye.
In the first place, net oil imports are virtually certain to continuing falling in 2015—notwithstanding lower prices to domestic producers. That is owing to the “sunk capital” phenomenon, which is especially true in the capital intensive petroleum industry, and especially in the shale patch. Based on fields already opened, production infrastructure in place and wells already drilled, shale oil production is likely to continue rising this year—- along with condensates and NGLs from the wet gas fields.
Stated differently, what will be hit hard in the short-run is oilfield investment spending on drilling rigs, supplies, crews and new acreage leases. The multiplier from that will hit restaurants, bars, car dealers and strip malls in Bakken,Eagle Ford and the five big oil states generally— long before daily production peaks and begins to roll-over owing to the steep decline curves on fracked wells.
As is by now well known, all the net gain in US payroll jobs since January 2008 have been attributable to the five shale states. Now, perforce, begins the great unwind.
[13]
This prospect marks a sharp change from the oil price plunge at the time of the 2008 financial crisis. Back then, net imports totaled 11 million bbls/day and accounted for nearly 60% of domestic consumption. Accordingly, if the oil price collapse last time was mainly “off-shored”, this time it will be predominately “on-shored”. Due to the lagged impact of price reduction on current domestic production, net petroleum imports are likely to fall under 5 million barrels per day this year, or to approximately the 1972 level.
In all, the net benefit to the US economy—-even on a crude first order basis—is likely to be less than $100 billion per year. Moreover, some of that re-allocated spending will go to imports of goods and services, reducing the mathematical net gain even more. After all, net imports on the current account amount to nearly 15% of GDP; and the overwhelming share of “stuff” that might benefit from spending reallocation—-shoes, shirts, i-Pads,furniture, flat-screen TVs and all the other trinkets sold at Wal-Mart—- still come from China and its satellites.
But there is something else. Even the modest recovery in personal consumption spending over the last five year has been disproportionately attributable to the top 20% of households; the customers of Macy’s and Nordstrom’s.
The rest of the main street households have experienced virtually no real wage gains and are still underwater or nearly so on their mortgages and have maxed out their credit cards. They have also already bought new cars on cheap credit at more than 100% LTV ratios and are facing sharp increases in the cost of employer provided or Obamacare health insurance. Most crucially, upwards of three-fourths of the bottom 80% of households don’t have even $500 of cash savings for a rainy day.
So its just possible that the Keynesian economists and their Wall Street fellow travelers have called for a consumption party that few American will join. Indeed, the chart below should be an ever-lasting rebuke to the Wall Street touts peddling the “oil tax cut”.
The household savings rate is again at rock bottom following a temporary uptick after the last crisis. It just might be that the $2 per day savings on gasoline now accruing to the 80% will end up in the piggy-bank, not cash registers at the strip mall.
In any event, the $300 billion net decline in cash flow to the domestic petroleum industry is certain to take a deep toll on the bloated level of capital spending and jobs that has resulted from more than a decade of rampant money printing by the Fed and other central banks on a worldwide basis.
The global commodity, industrial and construction boom that resulted from this monetary madness is already cooling visibly and relentlessly by the day. $30 oil and $30 (per ton) iron ore are already realistic possibilities. And those indicators are only the leading edge of an era of worldwide deflation of profits, investment, trade and debt fueled consumption.
The touts have it backwards. This isn’t about greeters at Wal-Mart handing out tax cuts to hard-pressed American consumers. Its about the coming liquidation of the massive malinvestments and bloated economies that have been enabled by rampant central bank money printing and the resulting madcap expansion of unrepayable debt.
Buying-the-dip was always a strategy that would work until it didn’t. The “oil tax cut” tale is designed to ensure that Wall Street’s Muppets will be the last to get the word.
