The market is about as sensitive as it can be these days, but underneath all of that hyper-responsivity and ensuing erraticism is the desire to go up. That long-term need will not go away, despite dark painting of ho-hum economic news. Yet, even with the desire to go up, the market understands that it cannot go up without achieving balance along the way. Thus, we will have periodic rebalancing pullbacks with an occasional “freak out” to achieve consolidation at various levels, levels that technicians call floors and resistance points.
Yesterday was a bit of a freak out, but taking some off the top actually does the market good. The global economy, although not robust exactly, is moving forward and the US economy, the current engine of the world economy, is doing the same. It is the up and down in the numbers that throws the market, that keeps the market on edge, but what always gets lost in the myopia of the news reporting is the underlying data that is part of a larger more robust reality.
For example, let’s look at the reporting on the crude-oil inventory report that came out yesterday.
- Crude oil inventories for the latest week rose more than expected (2.7 million barrels vs. 2.1 million barrels), and are now just 3.3 million barrels from the all-time record high seen in July 1990.
Mostly, the media reported this stunning data as a result of weak global economic activity. To a degree, this is true, but underneath that reality are several others. One key reality is that with an inventory this high, the laws of supply and demand will more than likely trump the forces of speculation, meaning, the price of oil, and thus gas, will come down. The effect of this is more discretionary income for a global economy that depends on consumer spending. Looking at this data this way suggests the weaker-than-expected ADP employment report is a blip, a minor downward move in an otherwise upward trend.
The media’s reaction to the oil-inventory report neglects to highlight that the Saudis, and OPEC by extension, do not feel the need to decrease the 30 million barrels of oil they are putting on the market each day. In other words, they would like to see the price of oil come down to the $80-$85 range, so the huge inventory works in their favor.
Additionally, another piece to the contextual puzzle I mentioned yesterday are the reasons for the huge inventory. The media fails to play up the larger story here, which is that the US, the largest consumer of oil in the world by a wide margin, is simply using less oil. Natural gas and more fuel-efficient cars are keeping inventories high and the price of oil stable. Add to this the fact that the US is producing more oil that it has in 20 years, which is pressuring the inventory levels as well.
An even larger story is the resurgence of American manufacturing, partly propelled by cheaper energy costs. As natural gas makes its way into the blood of American manufacturing, the cost of production goes down. Now add to that higher cost of doing business in China (the rising middle class makes labor more expensive), technology making factory production more efficient (one reason for the lackluster employment data in the last four years), and the general cost of labor in the US going down. Now, you have a situation that suggests insourcing just might be the new wave for big business. What is not a suggestion, however, is the reality that all of the above is making the US a growing exporter of goods, reversing a decades-long trend of decline.
- Exports are running at about $180 billion a month, according to Commerce Department data, up from $140 billion a month two years ago. They are currently growing at an annual pace of about 16 percent — a percentage-point higher than necessary to double exports to $3.1 trillion by 2015.
The larger context also includes the other economies of the world that benefit form cheaper energy costs. China is certainly one, and we have seen the recent good economic numbers from that country. The other is the third largest economy on the planet, Japan. Its vast manufacturing sector will benefit from the downward pressure on oil prices and that will go hand-in-hand with the news out of Japan that “Abenomics” is on the move in a big, big way.
- The Bank of Japan unleashed the world’s most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion (929.3 billion pounds) into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.
Japan has joined the ranks of those countries trying to stimulate economies monetarily. Will it work? Well, it has worked here in the US and it stemmed the European debt crisis, so it is likely Japan, and thus the global economy, will see something positive from the stimulus in the near term, very near term.
The larger global context is good, even if the day-to-day reporting of the news keeps the market on edge. My guess, though, is the market understands the larger context, and this is the reason it is not totally freaking out, why it wants to go up, and why it continues to go up. Sooner or later, inertia will take hold and the momentum will become clear, even to the breathless media.
And, one final thought … I have been studying up on Latin America, and what I am finding can be summed up in the sentence below. The economies there are working to overcome their problems as well, one of them being energy.
- During the last two years, the administration of President Rousseff has been implementing tax reductions and lowering costs (such as power) in an attempt to prop up the faltering Brazilian economy.
Trade in the day; Invest in your life …
