For Once I Agree with Larry Kudlow
Larry Kudlow wrote, “One of the absolutely stupidest things I have heard in recent weeks is that the recent drop in oil prices is bad.” Stupid, indeed. I wouldn’t even use falling oils prices to claim I won my bet that the economy would enter a stormy period this fall. All the same, Larry practically hands me the winnings on my bet.
As Kudlow says,
Serious people on financial television are saying lower oil prices are a signal of worldwide economic collapse. Here at home that translates to recession, deflation, a profits collapse, and rising unemployment. I’ve been around for a while, and I’ve seldom heard such gibberish. (MoneyNews)
Larry Kudlow confirms economic volatility predicted six months ago
It surprises me that market analysts could be so backward in their thinking about the effect of oil prices, and lame thinking from market analysts and economists rarely surprises me. Yet, it surprises me even more to find Larry Kudlow, of all people, confirming my prediction that the economy would falter in the fall. Granted, he isn’t saying above that the economy has fallen, but he is admitting that market analysts are now fearing that we are entering a global economic collapse. Kudlow also acknowledges the severity of the past week’s market drop and the general atmosphere in the marketplace turning gloomy:
Steep stock market corrections often create shrouds of pessimism that do bad things to people’s brainpower….  The latest stock market scare stems from a bunch of fears, like the possible spread of Ebola, economic slowdowns in Europe and Asia, and deflation worries. And when the stock market decides to correct, any reason will do. We must respect the wisdom of the market.
Larry nearly worships the stock market in claiming it has wisdom to be respected. I disagree. The market has no wisdom whatsoever. It usually reacts in knee-jerk fashion. Wisdom can see ahead a bit, but the market is reactive, not predictive. Where it does look forward, it mostly speculates on what it thinks most investors will do. It reacts so sharply now exactly because it failed completely to see all year the truth about its own condition.
What you’re seeing in the present stock market dive is that the market has become entirely dependent on government stimulus. It is a balloon that was inflated with the hot air of free new money blown into it by the Federal Reserve. It rose along with the stimulus, but as soon as the hot air was taken away, the market started to fall out of the sky, and that is what I predicted six months ago would happen exactly now. If the market is a god to be praised, it is a sleepy god with neither insight nor foresight.
Still, I’m glad to see Larry confirming that this was a “steep correction” that indicates a scared market. While I won’t leap ahead as far as claiming this has been the market crash that I said more recently was likely, it has certainly been a crash for anyone whose primary income is from investing. Many investors have seen their entire income for the year wiped out in one fall. That’s a pretty scary ride that comes just as the government shuts down the flame under the balloon.
Kudlow acknowledges sour awakening during economically volatile times
Larry also observes that the sharp nosedive has turned many people who may have once had brainpower into pessimists. Suddenly the rosy optimists have turned tail and become pessimists. That’s economic climate change in one week, and that kind of big swing can only come from fear. That kind of fear comes from realizing suddenly that the reality around you is not what you once thought it was. If reality becomes completely clear to them, the unexpected awareness of an open chasm beneath them may become horror.
I practically stood alone when the rosy-eyed bulls were all cheering the market upward last spring and summer, claiming their bull run was nowhere near ending. From that lone position, I bet my blog that the economy would turn so volatile in the fall that people would start to wake up to the realization that recovery was not happening. Now, in one week, many have turned from the optimists they were back then to frightened “pessimists” because they didn’t see this coming. I’m not frightened because I did see it coming. For me, it is no surprise at all.
It’s also nice to hear Larry Kudlow agreeing with me about the forces that are knocking the market around, which I referred when I placed my bet as the “head winds” that would blow against the economy in the fall.
While I’m not forecasting calamity in my 2014 economic predictions, it certainly looks like a stormy fall ahead of us as these pressures start to build against the global economy. I’ll bet this blog when it comes to my Economic Predictions 2014…. Those mega forces by themselves will put the global economy under great stress…. If only the forces that can now be seen and felt are the ones at work, then the economy will grow worse but not crash. If something unexpectedly bad — such as war with Iran — bursts into the picture, then the economy could easily crash. What I am  certain of and willing to bet this blog on is that the economy will not do better this year — so certain, that I will quit writing this blog if I’m wrong on that prediction.
Ebola is the unexpected trigger I said would likely arise just as the market is being knocked around by the headwinds. When people suddenly start to realize there is no floor under them, something like three sick people among sea of half a billion can put a shudder through the market.
Why crude oil prices falling will not collapse the economy
Lower oil prices are a silver lining on the clouds of doom — not for the oil industry, but for all other industries. Not for the Dakotas et. al., but for everyone else. Even Bakken oil field workers will be fine unless the price drops quite a bit more, but it won’t because one of the big reasons oil prices are dropping is that the Bakken oil fields have increased global supply dramatically. If prices drops to where oil production in that region starts shutting down, then prices will go back up because that supply starts dropping; and so the market will find an equilibrium because it wants that supply.
Not too surprisingly, the market analysts who opine on the economy are wrong even when they start talking about a bear market. For oil prices to drop below what is profitable in the Bakken shale, the economy will have to decline more on its own. So, the drop in oil prices is not going to cause economic collapse, but a collapse of the economy could cause a further drop in prices and cause the oil fields to shut down. The only other way for oil prices to decline more is for some other part of the world to hugely increase oil supply, thus increasing competition on prices, but that doesn’t look likely in the near future.
Or, as Larry puts it,
Let me help all those analysts who have lost their minds in this stock correction. We’re witnessing a big outward move of the energy supply curve. By nearly doubling our oil output in recent years, it’s surprising the oil-price break hasn’t come sooner. It has very little to do with falling demand.
Of course, I am not changing my argument about a falling economy, but the drop of crude oil prices is actually an updraft within the present storm. It can help keep the economy aloft as the Federal Reserve turns off its own the hot air.
Still I thank Kudlow, since he is one of the markets most optimistic bulls, for confirming that this fall’s stock market has turned down so sharply that analysts are losing their minds and starting to believe that recovery was just an illusion. Clearly the illusion of recovery is starting to break up now that the market is no longer floated aloft by hundreds of billions of hot-air dollars.
Kudlow’s acknowledgements bring me very close to declaring victory on my bet; but I’m going to be conservative and hold off a little longer to see where all of this truly goes.
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