Oil in the $80 dollar a barrel range seems to have spooked lots of commentators but not Ed Morse, head of commodities research at Citi, who points out, at these levels, the world economy as a whole would enjoy the equivalent of a huge quantitative easing program generating an annual windfall of $660bn. The difference of course is that this money boosts the spending and investment power of consumers and companies ie the real economy as opposed to QE “stimulus”, which has mainly sat in the banks doing very little.Low oil prices could also have other interesting benefits as it should cool the ardour of certain wealthy arabs to finance war, put Putin on the back foot, and stop associated lackeys from fuelling unproductive property hotspots all over the place. Talking of the Middle East, other positive things are going on such as Iran talking to the Americans, establishment of a broad coalition against ISIL, and Turkey having to rethink its general political attitude. Worth remembering that if the Middle East was as disastrous as some would have you believe, oil would be a lot higher than $83. But back to QE, briefly. When the Fed brought QE to a close, interest rates were supposed to rise but that hasn’t happened. Why is this? Perhaps the answer lies in the fact that many important countries are beginning to attack their debt mountains and this in turn is beginning to decrease the demand for loans, thus keeping interest rates low. For example the US deficit for fiscal 2014 was just 2.8 per cent of GDP compared to peak recession levels of ten per cent. Tax receipts are up and profligate government spending such as Pentagon propping is well down. That other overheated engine of debt madness, China, now looks determined to break its $26tn credit bubble. Premier Li said recently “we cannot rely on increasing liquidity to stimulate economic growth” Recognition of the problem by decision makers I would suggest is a positive not negative for markets. Politicians are usually inured to telling porkies but the rise of UKIP will inevitably lead to our political establishment becoming more honest for awhile and that has to be a positive development. Have you noticed that lies about the EU, immigration policies and even your retirement age are beginning to diminish? This message may not have got through to North London’s socialist bubble yet but it will before next year’s election. And then there are signs of good things happening in big company land. At long last there is a concerted effort to diminish multi- national corporate tax dodging. More people are beginning to question the validity, for example, of FTSE 100 companies paying their executive directors an average of 120x that of their full time staff (first highlighted in a September 2013 article). Old complacent leviathans like Tesco are being challenged by new kids on the block and that is good for capitalism. Even the current loss of nerve by investors has the silver lining of meaning less greedily priced IPOs and some thankfully being pulled altogether. High street banks are never sensible long term equity investments so it was good to see the Aldermore float withdrawn this week. Fingers crossed that Branson’s latest offering also goes the same way. There is still the problem of Germany, of course, which remains supremely uninterested in the plight of its single currency neighbours. But even here there maybe signs of life as its insulation from the economic difficulties of others is wearing thin, so it may not be long now before Merkel & Kinder are shaken out of their dangerous complacency.
October is often a cruel month for investors so it is entirely possible that all of the above will be ignored for a while yet but I firmly believe equity markets, particularly here in the continuing United Kingdom, will be very rewarding over the next two to five years. Hang onto your hats.
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