In Search of Explanations
Pfäffikon SZ, Switzerland – The last several months have made painfully clear how interwoven the financial markets have become. The American dollar plays a lead role in this. If the dollar moves – then suddenly a lot moves with it. In this context it is interesting to see how the oil price develops and what its impact is on the global economy. Many market participants – in light of recent reactions to the global markets – are of the opinion that a declining oil price is bad for the global economy. The key question is: Is this a correct assessment?
Decline
Common wisdom holds that declining oil prices are bad for jobs, wages and dividends. When we hold this against some figures this view becomes validated. In some regions jobs related to the oil industry declined by about 8%. Moreover, the hourly wages in this sector declined by roughly 10%. For certain oil related businesses dividends are indeed under pressure. It’s worth mentioning Royal Dutch Shell that, going against better judgment, is continuing to try and hold on to its long history of dividend policy. Additionally, investments are being curtailed which influences many different layers of the economy.
On the other hand the oil price is a blessing for consumers. The issue is, however, that this effect is only visible at a later stage. Initially, the first level thinkers see the negative effect while overlooking the positive effect which is slowly building in momentum. This transfer of wealth simply leads to greater purchasing power for an extremely large population. Moreover, fiscal and monetary stimulus measures will only add to this effect.
Saudi Arabia
Everyone knows that an excessively low oil price is not sustainable in the long run. When you think of Saudi Arabia you probably imagine expensive cars and large yachts. This bulwark of unlimited and excessive financial behavior is under considerable pressure. The country’s deficits are running up and for the first time significant financial reserves needed to be called upon to bridge the gaps. This is, without a doubt, a turning point in the mindset of the gentlemen in the Middle East: Even the mighty Saudi Arabia is being brought to its knees.
Explanation
This would possibly explain the strange drop between 21 and 24 August this year when the S&P suddenly lost 7% of its value. It’s known that some large hedge funds and asset managers were confronted with a flight to cash on part of namely oil related nations such as Saudi Arabia. I cannot help but think that many parties have made use of this situation. I experienced a similar situation before the start of the Gulf war in 1990. Famous and successful investor Carl Icahn recently stated that the maffia employs a better code of ethic than Wall Street does. Perhaps he’s right. It’s remarkable to think of all that what a decline in oil prices can bring about.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
