The start of 2016 has been rough. The global economy is still growing but slowing, and global risk measures have risen. There are several reasons for this: concerns regarding the impact of oil price instability on the state-controlled oil producing countries; uncertainty regarding the future direction and outcome of current central bank policies is also rising; investors are concerned with the pace of the slowing of the Chinese economy; and the impact of the tremendous flow of refugees into Europe is uncertain. An important point to keep in mind right now is that this is all “known” and priced into assets. Also remember that global certainty and synchronized growth is not a normal state of the world. We expect some stabilization with respect to Chinese economic data and even oil prices, and that should lead to a better second half for investors. The US headlines will obviously be dominated by election year politics, but academic research indicates that how people behave and spend has little relationship with how their candidate is doing in the polls. With all of the news flow regarding stock market cycles and election cycles - most of which has little predictive value - this is an important fact to keep in mind.
Oil: Markets are up today, ostensibly on news of an agreement between Saudi Arabia, Russia, Qatar and Venezuela to curtail production increases…conditional upon Iran and Iraq doing the same. Seems like a pretty tough task, this “reassembling” of the OPEC cartel, particularly when the deal rests on collaboration between Saudi Arabia and Iran. The Saudis are predominantly Sunni Muslim while Iran is mostly Shiite. These two sects have been at odds for centuries and the two countries have been in a cold war for decades (Bloomberg). But OPEC has managed to restrict production in the past despite imperfect member cooperation. Clearly the stock market views oil price stabilization as a good thing, no doubt because it supports stabilization of the volatile economies involved. By the way, the world’s largest oil producers by far are Saudi Arabia, Russia, and the Unites States. Each of these countries more than doubles the production of the fourth largest producer, which is China (Iran and Iraq are numbers five and six).
None of this really helps Texas much. As mentioned previously, the real impact of declining oil prices on jobs takes one to three years to hit, according to Texas A&M University. The next 12 to 16 months are expected to be particularly tough with respect to layoffs in Texas, and that tends to affect real estate, manufacturing, and spending on consumer durables/big ticket items, etc. So I would expect things to get worse here in Texas before they get better.
Posted on Tue, February 16, 2016
by Josie Coiner