It has taken the U.S. economy five or six years to have any kind of hope of recovering from the financial crisis of ’08. And it would have been a much tougher go, if central bank easing had not been as aggressive.
But, easing in any form is really not a solution at all; it is merely a band-aid that does nothing to rid the patient of the infection of greed.
A soft landing by any other name is still a soft landing. And, as the U.S. Federal Reserve now seeks to guide the economy onto a less risky, more stable trajectory, unexpected free market shenanigans loom at the margin to threaten economic stability and growth.
Let’s start with oil. Anti-U.S. fracking interests have begun the first round of sabre-rattling which has resulted in a spectacular drop in the price-per barrel and the price-per-gallon at the pump.
At first glance this might appear to be a blessing for the consumer. And, it would be just that if oil prices can stabilize at or around the $60 level. But, many traders, myself included, tend to believe we have at least $10 or $15 to go before all the speculative selling will be exhausted.
Wherever oil prices ultimately settle and form a stable base, it will not be a protracted affair. We will probably see a return to the mean sometime in the last half of 2015.
Thus, the weaker fracking interests that some analysts have predicted would be forced to shut down both development and production operations will likely not have to do so en masse. Only a few may get pushed out, and whatever recessionary pressures that were caused by a slowdown in Shale development will ultimately ease, and the industry will be able to resume it’s long-term plans.
As oil analyst Jim Veire pointed out at our recent family gathering on Christmas eve, The credit card banks take a punch on the chin by way of a substantial decrease in merchant fees from gasoline retailers. With prices at almost half of what they were a few years ago, credit card fees paid by the gas stations are also sliced in half. This will inevitably weigh on the sector for the next year or two.
But the bigger story here, if also the more stealthy one, is the U.S. Dollar. It’s meteoric rise in the past few months poses a much greater threat to the U.S. recovery than either the oil or banking story.
As FT columnist Gillian Tett wrote in the December 18 issue, emerging market companies, particularly in the so-called BRIC group of countries (Brasil, Russia, India and China), are loaded up on over US$2 trillion in offshore debt, just over 70% of which is denominated in US dollars. For example, firms based in Russia where the rouble has taken a pounding in recent months, now find themselves in a rather pronounced currency squeeze that becomes difficult to service.
Another twist to the tale is that the structural weaknesses caused by this currency imbalance are not at all likely to show up clearly on companies’ balance sheets because much of the debt is in offshore accounts, sometimes under names that provide no clear linkage to the parent firms.
Further complications arise when the offshore cash is converted and repatriated to the parent’s country. It then is able to be labeled, in many cases, as foreign direct investment.
We all know what eventually happens to share prices when companies use accounting tricks to obfuscate the truth. And, when the debt gets serviced in an awkward and less well-planned fashion, other expenditures will surely suffer.
This all translates to more than a trivial threat to the US recovery as global demand, which is already in intensive care, could get another more widespread and protracted version of the 1997 Asian financial crisis.
So, while you might think the wrong debt decisions made by some emerging market companies will not effect your accounts stateside, don’t be surprised when the raging, if aging, bull run enjoyed by equities takes several months or more off to catch its breath.