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Will There be a Possible Analogy Between Oil Production and Cash Balances?

As written several times, the $50 drop in crude has transferred about $1.5 trillion from oil consumers to oil producers.  It is a defacto stimulus to Europe, Japan and US, a stimulus that is more powerful than any government program given the monies saved goes directly to the consumer and business.

Estimates vary as to the amount of stimulus but estimates range from $350 to $500 billion in the US alone.  Wow!

I also wrote because these funds are equivalent to main lining sugar, the impact of dropping crude could be felt immediately.

Yesterday November sales were released and the data was a large upside surprise. Sales ex autos were expected to rise by 0.1%.  They were up 0.5%.

Is this surprising strength in retail sales impacting employment?  Weekly jobless claims were also posted, claims which surprised on the down side.

Next week the FOMC holds its final meeting of the year.  Will the Committee drop the phrase “considerable period?”  Several senior Fed officials have commented the decline in oil is now an economic tailwind which can conceivably add 0.5% to GDP.

Typically the December Fed meeting is a non-event where no action is taken for a myriad of reasons but this year can be the exception.

Monday the front page of the Wall Street Journal reported the largest money center banks may soon be charging or returning deposits to its largest depositors because of the massive liquidity in the financial system.

As noted a gazillion times, excess bank reserves are now over $2 trillion versus the historical level of $1 to $2 billion.

Reiterating a St. Louis Fed monetary velocity study, monetary velocity or the turnover of money is at an all-time low of 4.3x versus the historical average of 17x. If monetary velocity accelerates to its average, the St. Louis Fed is suggesting the inflation rate could soar to 33%.

No one suggested the current five month 45% slide in crude would occur, the result of too much production, a decimation that is now threatening the very existence of some countries.

Inflation is defined as too much money chasing too few goods fearing higher prices tomorrow.  Will tomorrow’s surprise be strong growth that elevates demand pull inflation as these massive cash balances are utilized in a more efficient manner?

Some—after the fact—have commented today’s oil slide was inevitable if the data was truly analyzed.

Will there be a possible analogy between oil production and cash balances?

Returning to the here and now, equities were initially posting strong gains on the data but closed only moderately higher following Saudi Arabia’s reiteration that they have no plans to slow production.  The 10-year was essentially unchanged.

Last night the foreign markets were down.  London was down 1.27%, Paris down 1.36% and Frankfurt down 1.09%.  Japan was up 0.66% and Hang Sang down 0.27%.

The Dow should open moderately lower on oil weakness as oil is down another $0.75/barrel.  Even the fiscally conservative Nordic country debt is beginning to be affected. Wow!  Reiterating a previous comment, the question is no longer of companies failing but rather countries.

The 10-year is up 12/32 to yield 2.12%.  .

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.