I see the market has opened on a positive note this first trading day of 2012. Nothing in the world has changed since last Friday, so this big jump out of the gate suggests the market sees opportunity, perhaps.
The U.S. economy ended 2011 with a bit of momentum in the right direction. Although Europe has a ways to go to solve its issues, it too ended 2011 heading in the right direction. China, the next big player in this economic triumvirate, also ended the year heading in the right direction, although that direction is opposite of the U.S. This is the right direction for China because anyone who understands economics understands that a growth rate exceeding 9% is just like the big soap bubbles we encourage our kids to blow up and then watch explode as they waft easily through the air. China has to slow itself down, and it is doing just that.
So, the two big 2012 questions are: where will oil prices go and will Europe invigorate its slowing economy? Both create a conundrum. Simply, if the U.S. continues its economic momentum and Europe finds a way to reverse its economic contractions, speculation will drive the price of oil through the roof, which will then effectively hamper global economic growth.
Now, a counter to this is China’s engineered economic slowdown. As China slows, it imports less oil. Will that slowing be enough to keep a lid on prices? Another counter to higher oil prices is Libya coming back on line with its oil. When up to full capacity in mid-year, expect 1.5 million (give or take) barrels per day coming onto the market. Add to this, OPEC’s desire to keep the price of oil nearer to $90 then to a $100, and maybe oil prices will stay put.
Now, all of this is well and good, but as we saw in 2011, geo-political forces can move the market harshly and quickly. Last year, the politics of Europe and the U.S. moved the market. So far this year, the politics of Iran suggest it now might become the mover of markets, the boogeyman willing to scare everyone just because that is what boogeymen do. Although I think it high unlikely Iran will attack our carrier fleet when it returns to patrolling the Strait of Hormuz, the saber rattling could easily unhinge the oil market, as some 40% of the world’s oil ships through that narrow opening, the same opening Iran has threatened to close with its navy.
The underlying problem here is that Iran is falling apart economically. Not only is the rial (Iranian currency) falling quickly against the U.S. dollar, but the folks in Iran are getting scared as well. Long lines are forming in front of banks, as Iranians fear economic collapse. The sanctions that have been in place for years now are beginning to work. On top of that, new sanctions against Iranian oil exports and the banks that facilitate that are now in place for 2012. On top of both those bad things sits an 800-pound gorilla of national elections both there and here in the U.S. You can count on politicians here and there to stir up the pot with careless rhetoric designed only to create fear, which is a real way to garner votes in both countries.
Political leaders in tight spots can and often do act irrationally, so as this year starts, keep one eye on opportunity, the other on Iran, and after March, sneak a peek back at Europe. Oh, and don’t forget about the dysfunctional politics in the US of A. Just what the market needs – another wild card.
Trade in the day – Invest in your life …
