This is my 100th blog article and it will undoubtedly be one of my last entries. Next week, I'll be moving along to new employment but I couldn't help myself by commenting on the economy one more time.
Whether you could term them "Chicken Littles" or doom-and-gloomers, a great many economists at this moment misunderstand the stock and grain markets. They are also misinterpreting, in my opinion, where the economy will go from here.
First of all, a number of traders are warning that oil could hit $200 a barrel inside a month if the struggles in Syria destabilize the Mid-East, especially Iran. In my experience, trading on fear is a losing strategy. The fact of the matter is the U.S. has more barrels of oil in storage now than ever in its history. All things being equal, the price of oil today, minus the fear factor, should be somewhere in the neighborhood of $75 a barrel, not $94. That would put prices at the pump at about $3.10 a gallon. Instead, this sort of scare trading will only succeed in holding back the economy by driving up the cost of living. There's no doubt that increasing corn prices, as it affects ethanol, also have a hand in keeping prices higher. But, let's face it, the price of grain is also being driven by fear of drought. While the crop may be diminished, there will probably still be a harvest of around 12 billion bushels, plenty to offset domestic and world needs. Even with all these problems, I predict oil will have trouble getting back over $100/barrel and staying there for any appreciable length of time.
Secondly, the stock market continues to rise based on the illusion that some parts of the economy are getting better. Taking a hard look at the data, however, would show that housing, employment, interest rates, and consumer spending are all down and will not improve for the foreseeable future. Let's not even talk about Europe and the eventual meltdown of the euro. Interest rates are low, banks have plenty of money, but no lending is taking place. The Fed has run out of answers and will now let the economy take its course. If it does, expect the markets to level out very soon and begin a downward trend over the next 6 months.
On top of that, the threat of "taxmageddon", the expiration of all the Bush-era tax cuts, is very real. Some politicians have already threatened to allow the cuts to expire to gain a political advantage. Politics aside, allowing the greatest tax increase in U.S. history isn't good for anyone, rich or poor, Democrat or Republican, the 1% or the 99%. If the tax cuts expire, expect another recession that will keep us locked into a no-growth mode for at least two more years.
So the politicians and traders can stop trying to scare everyone. Things are bad but could be worse. While the economy isn't dead yet, the government and the economists are certainly giving it a good try.
~ Don Luensmann, Executive Director