DON'T PANIC! Cause It Won't Help Anyway.
Today would be a good day to buy the dip, right, Eric?
Only, not right now, because, as we are typing this, trading in the New York Stock Exchange was shut down for 15 minutes after the S&P 500 dropped seven percent in the first four minutes of trading, triggering the automatic shut off provision. Whoopsie! This is the first time that's happened since December 2008, at the height of the financial crisis. You remember the pile of shit that George W. Bush and his idiotic tax cuts left for a Democratic president to clean up? Because history may not repeat itself, but it sure as hell does rhyme.
The proximate cause of this morning's chaos is partly coronavirus, of course, and partly a little love note from our pal Vladimir Putin, who just deliberately crashed the world oil market to fuck American shale producers. Let's oilsplain!
Six years ago the Organization of Petroleum Exporting Countries (OPEC) and Russia agreed to pump a whole lot of oil and flood the market to depress the price. Their hope was to make oil so cheap that American companies would be driven out of the fracking market, since it's more expensive to frack those dead dinosaurs out of the ground than it is to pump them through a traditional oil well. And it kind of worked for a while — remember all those stories about boom and bust in North Dakota's shale industry? But that oil was still in the ground and with the sunk costs of drilling down to get at it already paid, America's shale industry survived, with most of the big players coming through intact. Meanwhile, all those petro-states were getting killed by selling their oil so cheaply, and in 2016 they tapped out and agreed to cut production and raise prices again.
Here, have a chart, courtesy of Statista.com.
See how the prices went up as OPEC and Russia cut oil production? The problem for them, though, was that the US was simultaneously ramping up production as the price increased, so OPEC had to keep on cutting its output just to stop the market from becoming glutted with American oil and driving the price back down. And while the Saudis and Emiratis have infinity money to cushion the blow, Russia does not.
In Russia's eyes, propping up the oil price amounts to a subsidy for American shale producers. Moreover, Putin is furious about US sanctions on its oil industry. In December, the US sanctions effectively halted the $11 billion Nord Stream 2 oil pipeline that would have allowed Russia to export gas directly to Europe, bypassing Ukraine. The US has also made it more difficult for Russia's state-owned oil company Rosneft to do business in Venezuela. So Putin was already pissed off, even before coronavirus decimated demand, particularly in China where orders are now down by 20 percent.
On Friday, Putin's energy minister walked into OPEC's headquarters in Vienna and dropped a figurative bomb: Russia wasn't going to go along with any more production cuts. Trump's BFF wants to go back to flooding the market while demand is low to try to bankrupt US shale producers. At which point, Saudi Arabia slashed oil prices 10 percent in retaliation.
Well, that's one way to look at it.
On the other hand, it did cause oil futures to drop THIRTY-ONE PERCENT before the market opened this morning, sending the Dow Jones Industrial Average plummeting 1,800 points and triggering the "circuit breaker" that halted trading. And you don't have to be Milton Friedman to figure out that this is NOT GOOD. Like, not at all.
We don't need to spend all morning explaining the inverted yield curve, but, in a nutshell, when you are lending the federal government money — i.e. buying a US Treasury bond — you would normally demand a higher interest rate on a long term loan than a short one, simply as compensation for having your cash locked down for years on end. When bond buyers are demanding greater interest on short term loans, it's a sign that they anticipate things getting very ugly, and they are willing to accept a lower rate of interest to keep their cash safely parked in US Treasury bonds. (If you think the market is headed for a crash, you throw your money into safe bonds, and you don't care if the rate is low.)
@tracyalloway @StephenSpratt @Ruth_Liew10 @jonfavs @TVietor08 @hhigginbottom @davidaxelrod you guys remember when w… https://t.co/7ufN52gWWo— Austan Goolsbee (@Austan Goolsbee)1583720635.0
Austan Goolsbee was the chair of Obama's Council of Economics Advisors, BTW. And markets are scared because, when bond buyers are willing to accept a lower rate on 10-year bonds than 3-month ones, that's usually a sign that the economy is about to go into a recession. Thanks, Obama!
Anyway, this is all fine. Luckily we didn't piss away all our emergency economic tools on pointless interest rate cuts when the economy was humming along fine.
OH, WAIT ...
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Liz Dye lives in Baltimore with her wonderful husband and a houseful of teenagers. When she isn't being mad about a thing on the internet, she's hiding in plain sight in the carpool line. She's the one wearing yoga pants glaring at her phone.