There is an argument making the rounds that this slump in oil is not going to be good for the general economy because there is such a large number of people that work for or are impacted by a slow down negatively. And lower prices do not offset the damage to the sector. Not my position but still a pause point for reflection.
” lower prices do not offset the damage to the sector.”
Lower oil prices do help the “real” economy where actual jobs are created in the process of adding true economic value.
However, the “fake” economy built on leverage and debt cannot sustain the default of debt of marginal players in the oil industry which cannot be paid back because of lower oil prices.
Bad news in the “fake” economy seems to be eclipsing the good to the “real” economy, which sprouts this sort of analysis.
The collapse of leveraged assets is something that will happen - and it will affect productive sectors of the economy just as it will the “fake” sectors - that would never have been created if not for “risk free” growth thanks to the Fed.
The Fed will try to bail out the lenders to marginal oil-patch players - attempting to defer the impact of this event in the near term.
It may work for a while - though in this case, I don’t see how the oil-patch jobs created by marginal players can be sustained - pumping high-cost oil out of the ground into an environment where it looks like we’ll have sub-$50 oil for a period of time.
Then again, a war that disrupts Saudi production could make things very interesting....
Booms are inevitably followed by busts. The hard part evaluate when you’re int he middle of either is “how far does it go”.
Myself, I separate phrases such as “the general economy” from “stock prices, stock index prices” because they can detach, widely. Nobody can really define what they mean by “general economy” anyway. Interest rates? Corporate profits? Employment? Productivity? Over the past say 5 years, I would say that cop profits have done quite well and that has shown up in the market averages. But many, if not most people, would not say their individual “economies” are exactly booming. Many are eating dirt.
In this zero interest rate environment we have had for several years, a zillion schemes and scams are concocted to produce yield; meaning add’l yield over Tsys. Some, many of those collapse after either rates rise or the leverage comes out of the underlying.
I am no better at predicting the future then anyone else, but these things are normal and happen with reasonable regularity. Thousands of laid-off oil workers over here, millions of consumers spending the $10/week they are saving on gas on crap over there.
Opinion department: I *do* think the leverage coming out of oil lending could definitely be an issue that is not over and will not be over for a fair while. I also think it remains early to nibble on oil stocks. At a minimum, I think it would be wise to wait until the end of the year. Because stocks that have underperformed often get tossed out, indiscriminately, at this time of year. USUALLY it happens move Oct-Novemberish, but this oil thing has really acquired legs in this last couple of weeks.