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Friday, 16 January 2015

Love Low Oil Prices

22:06 Posted by cheez 2 comments

Oil prices have hit near 5 year low; trading at or more than 50% below their peak several months back.
There have been many articles and reports stating that low prices are here to stay, and that a huge rebound is not expected within the next several years.
Although the retail figures published yesterday was disappointing, dropping 0.9% in December, it is not the key figure we should be overly concerned with.
Instead, more emphasis should be placed on the inflation index coming out today!

Markets should be based on fundamentals - the underlying economy.
However, since the beginning of the century, the markets have been dictated mostly by Central Banks' policies and their monetary stance.
The markets have been flooded with easy money from Quantitative Easing (QE) and record low interest rates.
These 2 reasons have result in an ever-growing asset prices in addition to the recovery of the global economy.



Central Banks fear nothing more than recession and deflation, although I would say they put more emphasis on the latter.
Low oil prices creates deflationary pressures.
Central Banks hate deflation, thus they would use all tools necessary and available to counter it.
Central Banks only have 2 tools: Print Money or Lower Interest.

We can expect 2 things to happen if today's inflation reports is lower than analyst estimate
1) QE4 to counter potential deflationary pressures.
2) Interest rates to remain at current levels or lower until end of this year.

As long as the economy grows (>0%), I would say that the above 2 possible actions by Central Banks will allow for the stock markets to hit a new high.
Thus, we need to love low oil prices, because they help keep the markets flooding with money.

If inflation goes up, it will spur demand for goods now and spin the economy wheel fundamentally.
If inflation goes down, Central Banks will QE or lower interest to create inflation, which boost asset prices.
Today's investment climate is a good investment climate because either way, the market will win!

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2 comments:

  1. Hi,

    Why do you want the market to rise if you are a buyer of shares?


    Leo

    ReplyDelete
    Replies
    1. Hi,

      1) I am already holding several positions
      2) I can add more positions if I think it is the correct stock/price.

      I have a general view that the market will rise because of improving fundamentals and/or QEs.
      The market will go up on good news, but there can be higher highs.
      So even if the market is up today, I wish for all else to be good because it can be up for even longer - months.

      It is more like a view that market will be up, so we should invest now instead of continue waiting :D

      Delete