Volatility is a good thing. If prices were predictable no one would make any money. Volatility is the heart beat of the market. When volatile events or ‘fears’ about bad stuff happen we take action to ‘hedge our bets’ or cover our assets. Without such rational behavior every trading day would be carnage. The sum of millions of individual decisions is called ‘market equilibrium’—the balancing of supply and demand—and the world depends upon it.
I’ve written before about the factors driving oil price volatility and its impact on the economy so I’ll spare you the sermon and go straight to the benediction:
- Fear is up because the global economy is weak. China worries about bubbles, corruption, choking air, rising costs and falling exports. The US worries our best days are behind us, that our government is choking us with regulations, that we are getting weaker abroad and inviting trouble ahead.
- We need economic growth to purge evil spirits in market psychology so we can see opportunity as well as risk in the markets. While OPEC hates it—oil is on sale at low prices and we cheer every time we fill our gas tanks.
- The election is OVER, it is time for our politicians to perform or be very afraid. Voters think the country is going in the wrong direction and we want to throw the bums out making each candidate sweat. The rise of both Donald Trump and Bernie Sanders was a vote of no confidence in partisan behavior as usual of scoring points rather than fixing our problems. Now is is time for them to get going or get gone.
- We need normal again with interest rates that reflect the real cost of money in the economy, as an incentive to save and to invest and begin to have normal business cycles rather than just artificial peaks and death defying valleys. The great recession is over and the end of FED quantitative easing is still un-easing. We realize the stock market is way up because interest rates have been way down for so long. But volatility may bring stocks lower as the Fed eventually raises interest rates to smooth the rhythm of the market to something approaching ‘normal’.
There is good news out there, people! Energy—we got that! And despite the politically correct politicians, we’ve got lots of it. The US is leading a revival of energy production. Gone is the fear of peak oil—we are not running out of oil. Gone is natural gas prices soaring into the stratosphere—natural gas is at below historic average prices and creeping back to market replacement levels. The US government threatens to regulate coal out of business but the rest of the world still needs coal.
Meanwhile US technology innovation is leading a clean energy revolution driving down the cost of solar panels (with help from China), accelerating research and applications of battery storage and electric cars, and aligning the big data analytics and machine deep learning potential of the Internet of Things (IoT) into a digital revolution where abundant energy, innovation in technology and markets returning to “normal” equilibrium point the way in the build up to the next boom if we can use the 2016 election to get the government off our backs and out of our way.
You get the message right, low oil prices are good news. We save money until ‘normal’ kicks in and prices return to market equilibrium. Normal is probably oil prices higher than we see today but not as high as we’ve seen. Normal is when fear is balanced by a perception of opportunity. When VIX is running wild, traders are running around like their hair is on fire dumping good stocks for CYA protection. Normal is when we see those same traders buying up stocks as low priced values are snatched up and held once again as they appreciate.
Normal is when we appreciate appreciation once again. Normal is good but first we must purge the evil spirits of market fear and government interference so markets are allowed to work the way they are supposed to work—find market equilibrium and it will reward you with a fair price!