Friday, October 17, 2008

Oil Price Drop Is But A Footnote In The News

Who would have thought that when oil finally dropped below $70/bbl, it wouldn't be headline news?

It's a testament to the suddenness and depth of the current financial market crisis, and its wider economic effects, that plunging commodity prices have become a footnote in today's business news.

As we listen to the usual stream of economists and economist-wannabes forecasting a US recession for the umpteenth time in twelve months, it's worth noting something I heard on CNBC this morning.

One guest observed that $150/bbl oil didn't actually bring on a US recession last year. We may be in a recession by year's end, but, on current data, we are not.

With oil now below half the price of that which had most economists screaming that recession was 'already here,' etc., should we continue to expect a looming, deep US recession?

It takes little imagination to understand that when most Americans have seen a 30% drop in the value of their net worth which is invested in equities, and some have also seen the value of their home drop significantly, they will feel poorer. And as such, they will likely spend less until they don't feel they are getting even poorer, still.

Nobody actually knows how long or deep a recession into which we may have finally just entered will be.

There are still differences of opinion as to whether inflation will now be muted. Some say it will, due to commodity price declines and the rapid evaporation of trillions of dollars of asset values. Who would have guessed that a tonic for recent commodity price spikes would be the sudden loss of global dollars by the simple fact of equity values dropping like a stone last month and so far in this one?

It's a strange new world, indeed, with such rapidly-moving and overwhelming economic and financial forces at work.

With all the comparisons of our current economic situation to that of the US in 1929-1940, especially by one novice Presidential candidate, you might be tempted to expect a "lost decade" of economic growth in the US.

However, that's unlikely. In fact, I could, and would, argue that the same forces of technology and information which propagated such a sudden, huge impact on financial markets and worldwide economies will also work in reverse.

It's not 1929 anymore. Governments operate with more financial and economic information. So, too, do investors. Flows of capital, trade, etc., all move at the speed of electrons. The linkages of data, expectations and consequential actions are all much tighter and faster 80 years on.

If anything, any coming recession is likely to be milder and shorter than the average expectations of both economists and US citizens.

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