Low Gas Prices Are Not Good For Consumers or the US Economy

Low gas prices are not good for consumers or the US economy. Remember back in late 2015 and early 2016 when oil prices fell which pushed down the price of gas?

We had headlines in the MSM that lower oil prices were a big boost to consumers and so consumer spending was going to rise. It didn’t happen that way.

Gas Prices and Jobs

Lower gas prices mean lower profits for the energy sector which provides good paying jobs for millions of Americans. It’s not just direct energy sector companies either. Real-estate in and around major oil fields saw a crushing drop and mortgage default rates surged when oil drilling rigs went idol back in 2015 and 2016.

Lower gas prices are a net loss for the US economy because of the loss of jobs that accompanies the price drop. While we fell for the MSM headlines back in 2015 and 2016, let’s not fall for it again. Lower prices at the pump do not result in a meaningful increase in consumer spending.

Gas Prices Pull Down The Stock Market

Lower fuel costs pull down the stock market and not just in the US either but around the world. If oil prices were to average $40 a barrel this year, oil-exporting countries would have to sell upwards of $100 billion in various investments to cover their balance of payments deficits. We know this because it’s exactly what happened in late 2015 and early 2016 when oil fell.

It’s not just oil-exporting countries that would be selling. Oil is the primary holding of the world’s largest sovereign wealth funds. Those oil positions extend margin credit to fund managers who use that margin to buy appreciating assets around the world. When oil goes down, it’s like a giant global margin call that goes out and forces fund managers to reduce positions or infuse new money into the fund to meet the margin call.

According to JPMorgan’s estimates, a $40 average Brent price this year would result in the sale of $67 billion in government bonds, $24 billion in equities and another $19 billion in corporate bonds, hedge funds and cash over the course of the year.

Charting margin debt (red line), West Texas Intermediate (brown line), and the S&P 500 (blue line), you can see the effect that oil prices have.

Notice how oil leads both margin debt and by extension the S&P 500.

Not only does the black gold pull down the stock market via the reduction of margin debt, it also results in lower earnings and hence the earnings recession we experienced in 2015. You can see this relationship by charting S&P 500 earnings (green line) over the price of oil and margin debt.

Oil began plunging in 2014 and that drop showed up in earnings about 6 months later. Notice that when oil turned up in February of 2016, earnings again turned up about 6 months later.

Low gas prices are not good for consumers or the US economy. Traders need to watch the price of oil. It’s all about the oil. So goes oil, so goes the US economy.

Terrifying US Pension Fund Charts

Pension funds in the US could be close to a collapse. There is an estimated $1.9 trillion shortfall in U.S. state and local pension funds because of low-interest rates and a sideways US stock market. Even stocks falling overseas is a problem for pension funds.

Credit Suisse published the chilling chart below on the funding gap at the largest 100 US pension funds.

Bloomberg writes

Pensions count on annual investment gains of more than 7 percent to cover much of the benefits that come due as workers retire. But public plans had a median increase of 1 percent for the year ended June 30, the smallest advance since 2009, when they lost 16.2 percent, according to the Wilshire Trust Universe Comparison Service.

Now it seems like there is a run on the Dallas Police and Fire Pension as employees try to claim benefits before the system becomes insolvent.

Pension funds are starting to drop hedge fund investments. Turn To 10 writes

Rhode Island plans to scale back its investments in hedge funds by more than $500 million over the next two years, and reallocate those funds to more traditional investments with lower fees.

Pension funds like Rhode Island are starting to be more defensive and are hunkering down. The problem though is that defensive US Treasury bonds mean way below 7 percent returns which means more shortfalls in funding are coming.

There’s no way pension funds can stay above water in an environment with low-interest rates and with equity markets at valuations that are sky high.

But wait, Democrats say everything is good, just look at consumer confidence that came out this week at 104.1.

consumer-confidence

There is massive offshoring of good paying US jobs, stagnant wages, soaring costs of health care and education, contraction in manufacturing, falling retail sales, and consumers pensions are dangerously close to collapse. Meanwhile, consumer confidence is hitting multi-year highs? Consumer confidence is starting to look like just another tool of public manipulation that’s out of touch with reality on the street.

Cotton Explodes Higher As Hedge Funds Move In

US cotton has exploded higher as speculative hedge funds have moved in. For two years cotton has been trading sideways because of China’s massive dumping of cotton onto world markets.

The WSJ writes

The government also lowered its estimate for U.S. ending stocks to 4.6 million bales from 4.8 million.

Shorting Cotton

I recommend against chasing cotton higher. Instead, shorting the cotton ETF BAL might be the better trade.

Shorting BAL is a very short-term scalp fade on a gambit that cotton has extended too far beyond the mean trend line and that a mean reversion move is likely coming.

[graphiq id=”l9vQrp0Hvi5″ title=”Cotton #2 Futures (NYMEX:KG) – 5 Years” width=”440″ height=”523″ url=”https://w.graphiq.com/w/l9vQrp0Hvi5″ link=”http://mutual-funds.credio.com” link_text=”Cotton #2 Futures (NYMEX:KG) – 5 Years | FindTheData” ]

Disclosure: I do not hold any position in cotton.