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Alan S Blinder recently pointed out that cheap oil is mostly good for the economy (except in North Dakota and Iran). He also pointed out that markets can stay i

Alan S Blinder recently pointed out that cheap oil is mostly good for the economy (except in North Dakota and Iran). He also pointed out that markets can stay irrational for a long time. I don't think oil is the cause of the market drop: stocks had been overbought for a while (if you look at historic P/E ratios), so it is natural for it to return to normal. Also, the increasing interest rate is going to put downward pressure on the stock market, even if the economy does well. Right now that is what I consider to be the main cause of the drop. What I mean is: In the market, there are day-traders, and long-term traders. The day traders are mostly responsible for the day-to-day gyrations of the market, and they've been looking at the price of oil as something to follow. Underneath that, though, the long-term traders have been removing money from the market (leaving it in cash, or switching to bonds), so even after the day traders get done, there is still a net negative. Of course, that's a simplification for explanation purposes because I don't want to write a book here.

seletz 11y ago
> ... (except North Dakota and Iran) ... And Norway, and Russia, and probably others. The economy in Norway looks pretty bad right now. And Russia is having very bad times right now I believe. At least in Norway it's because the oil price is way to low for them -- I heard that they break-even at $60 or $70 per barrel. That's pretty bad if practically the whole economy is based on oil.
- effie 11y ago
  Not whole economy is based on oil. It makes 30% of revenue and 50% of exports. https://www.regjeringen.no/no/aktuelt/the-norwegian-experience-in-the-oil-and-/id726975/ https://www.regjeringen.no/no/aktuelt/the-norwegian-experien...
  - dforrestwilson1 11y ago
    50% of exports is pretty bad in a world where you need/want things like iPhones and don't make them yourself. We're all very connected at this point.
- zaroth 11y ago
  Norway is near the high end with cost of production at $36.10 / barrel. http://money.cnn.com/interactive/economy/the-cost-to-produce-a-barrel-of-oil/ http://money.cnn.com/interactive/economy/the-cost-to-produce...
applecore 11y ago
> Also, the increasing interest rate is going to put downward pressure on the stock market, even if the economy does well. Right now that is what I consider to be the main cause of the drop. Really? The 10-year Treasury yield (the best measure of long-term rates) has declined by 25% since the start of the year. No one is forecasting Fed interest rate hikes in 2016 anymore.
- cynicalkane 11y ago
  Long term yields lower in response to tight money, not loose money. Economists who study market expectations found that the 10 year treasury actually rose with QE expectations, for example. This is rational: lower inflation and stagnant economy -> lower interest rates. At one point in time (sorry, I forget when) there was a surprising (to some) announcement of QE during which you could observe the result directly. The Fed announced it would buy more long term bonds, and the price of those long term bonds fell. It is also possible to disturb the equilibrium in one direction while moving it in the other direction. In the example above, the change in equilibrium (higher interest rates) outweighed the disturbance (lower interest rates).
toomuchtodo 11y ago
> I don't think oil is the cause of the market drop: stocks had been overbought for a while (if you look at historic P/E ratios), so it is natural for it to return to normal. If stocks are overbought, is that an indicator that there's a huge amount of money out there chasing returns? Returns it can't find elsewhere?
- zo1 11y ago
  Returns it has to find, otherwise you lose out due to inflation. I fully agree with you that there is a huge amount of money "chasing returns". Though I'd argue that it's more of a case of it being forced into chasing returns by virtue of all sorts of market distortions. A simple example is that of capital gains. Which is "taxed" at a lower percentage (at least in USA) than normal salary/profit income. I would argue that this simple and relatively benign-looking "incentive" is actually a market distortion that has far-reaching consequences.
  - toomuchtodo 11y ago
    > Returns it has to find, otherwise you lose out due to inflation. That's my concern really. Money is running out of places to go. * stocks (overbought) * real estate (still recovering from the last failure; already overbought in major markets) * auto loans (I hear murmurs we're in a subprime auto lending bubble) * oil (obvious!) If you're chasing returns, and you can't beat inflation (because you can't find those returns), your cash is slowly becoming worthless. Note my concern isn't because I have cash to invest: its because of the damage that rush of money has as it races into new "investment opportunities".
    - logfromblammo 11y ago
      So if you can't find a better return, you just drop everything into physical possession of precious metals, as the "inflation" there is limited to the amount of additional metal that mining can extract from the Earth. Paper money inflation is limited only by the number of bytes you can fit in your central banks' computers. You still lose purchasing power in a relative sense over time, but limited to about a -1.5% per year for inflation-adjusted gold. But really, it isn't that difficult to find an inflation-adjusted return better than -1.5%. Even a local family-owned restaurant could probably manage to eke out +0.1% or better just by hiring a part-time professional food-service manager to overhaul the formerly ad-hoc business strategy of mom and pop. The problem is that many large investors don't even want to bother with thousands of small businesses, because you need to invest in a lot to average out their risk factors, and each of them would require a lot of individual attention to become more profitable. Large-scale investors don't even want to deal with just a single chain restaurant brand like Olive Garden or KFC, so they buy Darden or Yum! instead, because food service is such a low-margin sector overall that you literally need thousands of restaurants in your portfolio in order to be a worthwhile investment to someone that is hands-off. Small business discovers it is more difficult to find investors with both the money to burn and the time to spend babysitting a relatively small investment. VCs don't want to invest $100k in a small business, restructure it, and then get $200k of value back; they want to invest $10M in a small business, restructure it, and get $100M back. Even if you could somehow bundle up all the locally owned single-location restaurants in the US, divide them up into grades and classes, and resell to investors, it would still be an unpopular place to park money. But if you could instead convince all those restaurants to take out small business loans, and you resell those, you're suddenly rolling in money. Lending is just a better, safer business to invest in than small-time food service.
jwesleyharding 11y ago
>I don't think oil is the cause of the market drop: stocks had been overbought for a while (if you look at historic P/E ratios), so it is natural for it to return to normal. p/e ratios are historically very low relative to interest rates
- AnimalMuppet 11y ago
  Because interest rates are very low relative to historic values. But they may not stay there; the Fed is starting to raise them. If they continue to do so, you're not left with the abnormally low interest rates, and so all you have is that stocks are high relative to P/E ratios. (I know, if...)

seletz 11y ago

> ... (except North Dakota and Iran) ... And Norway, and Russia, and probably others. The economy in Norway looks pretty bad right now. And Russia is having very bad times right now I believe. At least in Norway it's because the oil price is way to low for them -- I heard that they break-even at $60 or $70 per barrel. That's pretty bad if practically the whole economy is based on oil.

effie 11y ago
Not whole economy is based on oil. It makes 30% of revenue and 50% of exports. https://www.regjeringen.no/no/aktuelt/the-norwegian-experience-in-the-oil-and-/id726975/ https://www.regjeringen.no/no/aktuelt/the-norwegian-experien...
- dforrestwilson1 11y ago
  50% of exports is pretty bad in a world where you need/want things like iPhones and don't make them yourself. We're all very connected at this point.
zaroth 11y ago
Norway is near the high end with cost of production at $36.10 / barrel. http://money.cnn.com/interactive/economy/the-cost-to-produce-a-barrel-of-oil/ http://money.cnn.com/interactive/economy/the-cost-to-produce...

applecore 11y ago

> Also, the increasing interest rate is going to put downward pressure on the stock market, even if the economy does well. Right now that is what I consider to be the main cause of the drop. Really? The 10-year Treasury yield (the best measure of long-term rates) has declined by 25% since the start of the year. No one is forecasting Fed interest rate hikes in 2016 anymore.

cynicalkane 11y ago
Long term yields lower in response to tight money, not loose money. Economists who study market expectations found that the 10 year treasury actually rose with QE expectations, for example. This is rational: lower inflation and stagnant economy -> lower interest rates. At one point in time (sorry, I forget when) there was a surprising (to some) announcement of QE during which you could observe the result directly. The Fed announced it would buy more long term bonds, and the price of those long term bonds fell. It is also possible to disturb the equilibrium in one direction while moving it in the other direction. In the example above, the change in equilibrium (higher interest rates) outweighed the disturbance (lower interest rates).

toomuchtodo 11y ago

> I don't think oil is the cause of the market drop: stocks had been overbought for a while (if you look at historic P/E ratios), so it is natural for it to return to normal. If stocks are overbought, is that an indicator that there's a huge amount of money out there chasing returns? Returns it can't find elsewhere?

zo1 11y ago
Returns it has to find, otherwise you lose out due to inflation. I fully agree with you that there is a huge amount of money "chasing returns". Though I'd argue that it's more of a case of it being forced into chasing returns by virtue of all sorts of market distortions. A simple example is that of capital gains. Which is "taxed" at a lower percentage (at least in USA) than normal salary/profit income. I would argue that this simple and relatively benign-looking "incentive" is actually a market distortion that has far-reaching consequences.
- toomuchtodo 11y ago
  > Returns it has to find, otherwise you lose out due to inflation. That's my concern really. Money is running out of places to go. * stocks (overbought) * real estate (still recovering from the last failure; already overbought in major markets) * auto loans (I hear murmurs we're in a subprime auto lending bubble) * oil (obvious!) If you're chasing returns, and you can't beat inflation (because you can't find those returns), your cash is slowly becoming worthless. Note my concern isn't because I have cash to invest: its because of the damage that rush of money has as it races into new "investment opportunities".
  - logfromblammo 11y ago
    So if you can't find a better return, you just drop everything into physical possession of precious metals, as the "inflation" there is limited to the amount of additional metal that mining can extract from the Earth. Paper money inflation is limited only by the number of bytes you can fit in your central banks' computers. You still lose purchasing power in a relative sense over time, but limited to about a -1.5% per year for inflation-adjusted gold. But really, it isn't that difficult to find an inflation-adjusted return better than -1.5%. Even a local family-owned restaurant could probably manage to eke out +0.1% or better just by hiring a part-time professional food-service manager to overhaul the formerly ad-hoc business strategy of mom and pop. The problem is that many large investors don't even want to bother with thousands of small businesses, because you need to invest in a lot to average out their risk factors, and each of them would require a lot of individual attention to become more profitable. Large-scale investors don't even want to deal with just a single chain restaurant brand like Olive Garden or KFC, so they buy Darden or Yum! instead, because food service is such a low-margin sector overall that you literally need thousands of restaurants in your portfolio in order to be a worthwhile investment to someone that is hands-off. Small business discovers it is more difficult to find investors with both the money to burn and the time to spend babysitting a relatively small investment. VCs don't want to invest $100k in a small business, restructure it, and then get $200k of value back; they want to invest $10M in a small business, restructure it, and get $100M back. Even if you could somehow bundle up all the locally owned single-location restaurants in the US, divide them up into grades and classes, and resell to investors, it would still be an unpopular place to park money. But if you could instead convince all those restaurants to take out small business loans, and you resell those, you're suddenly rolling in money. Lending is just a better, safer business to invest in than small-time food service.

jwesleyharding 11y ago

>I don't think oil is the cause of the market drop: stocks had been overbought for a while (if you look at historic P/E ratios), so it is natural for it to return to normal. p/e ratios are historically very low relative to interest rates

AnimalMuppet 11y ago
Because interest rates are very low relative to historic values. But they may not stay there; the Fed is starting to raise them. If they continue to do so, you're not left with the abnormally low interest rates, and so all you have is that stocks are high relative to P/E ratios. (I know, if...)