New Normal Global Growth

Janet Yellen, OPEC and the “New Normal”


I know that this weekend most folks are shopping, buying Christmas trees and wondering how they ate so much on Thanksgiving. But this weekend is also the lead up to the most important month in finance and economics in years.

We are about to enter a month that is typically good for the stock market, but this time might not be. We have a pivotal OPEC meeting on December 4th that will determine their course of action with oil production. Then, on December 16th, the Federal Reserve, led by Janet Yellen is likely to raise interest rates for the first time since before the financial crisis.

New Normal Global Growth

OPEC

The OPEC meeting is important because no matter what they do with oil production – lower, hold or raise – there will be repercussions.

If OPEC, led by Saudi Arabia, surprises the market with a cutback in oil supply, even temporary prior to Iran coming online with more production next year, we could see the beginning of a big rebound in oil and gas stocks. If OPEC doesn’t cutback on oil supply, then we could start to see the dominoes tip over for a major international economic and financial market event as several oil producing nations go from being on the verge of collapse, to outright collapse.

If you have been following me, you know that I am bullish on natural gas long-term and expect oil prices to rise a lot faster than late to the game analysts believe.

Back when I predicted that oil prices would collapse – in MarketWatch the summer of 2014 – I pointed out that supply and demand was out of whack. Now however, with over $200 billion of capital spending canceled for new oil projects globally and U.S. oil production falling dramatically in recent months, oil supply and demand is already very close to being in balance. In fact, by summer of 2016, we could be going into storage for oil as demand is likely to outstrip supply around July. 

In watching what Saudi Arabia decides with OPEC, it is clear that while they want to protect market share, they don’t want to disrupt demand. With oil prices so low, there is a risk of demand destruction if a financial crisis comes out of nations like Venezuela or Nigeria collapsing, or if Russia or Iran becoming more violent. 

Regardless of what Saudi Arabia does, there is a very quick reaction that investors are going to need to make in order to stay safe or take advantage of a huge opportunity. In my updated “Oil & Gas Report” due out this week, I cover 15 companies, 3 mutual funds and 2 ETFs to be familiar with. 

Janet Yellen and the Federal Reserve

The Federal Reserve has not raised interest rates in nearly a decade. Since December of 2008, during the financial crisis, the Fed funds rate has been set from 0% to .25%, it’s lowest ever. This month Janet Yellen decides if it is time to raise rates.

Most of the arguments about whether the Fed should raise or not are based upon economic growth. Some argue things are fine and that it’s time to get off of the “zero bound” interest rates. Others point out that many people are still not looking for work and that economic growth is slow, therefore, we ought to keep rates where they are. 

I take a different view. I know that global growth is going to be slower in the next several decades than it was in the post WWII period to 2007. To me economic growth being faster than about 2% is not an issue. Easy monetary policy can only stimulate so much in a world with changing demographics, debt levels and technology. 

I am most concerned about inflation and I think that Janet Yellen is too. While official inflation is below the target 2% rate the Fed seeks, we are very close to shooting through that level. Here the interconnected wonkiness of economics is important to consider. Once energy prices rise, and they will, inflation will jump since those prices apply to inflation on a year over year basis. 

What that means, is that because energy is a major component of inflation and energy prices dropped about 50% in 2015, there is little chance that deflationary force will repeat. The “transitory” impact of energy that the Fed has mentioned repeatedly is on their mind. Suddenly that OPEC meeting means an awful lot to the Fed too. Interestingly, on the same day that OPEC meets, there is an unemployment report that will be important to the Fed decision on the Fed funds rate.

Another thing to consider in this interconnected world is that the International Monetary Fund is adding the Chinese Yuan to their reserve currency basket, called Special Drawing Rights or SDRs, along with the Dollar, Euro, Pound and Yen. This is important because it will make the other four currencies a little weaker.

Higher interest rates by the Fed would keep the dollar from falling much. That’s important because over half of America doesn’t worry about investments, they worry about being able to buy things like food, medicine and clothes. A stronger dollar helps them and helps keep the peace. This is a very important factor to the Fed’s mindset, and in particular Janet Yellen’s. Why is it especially important to Yellen, because she is a populist and she does not want to see “regular” people hurt.

McKinsey has made its view of global growth very clear. In my report linked below, I make mine very clear too. The “new normal” is slower global growth FOREVER – again, as I discussed in MarketWatch. Therefore, slowly normalizing interest rates is the right thing to do. I think the Fed, barring something unexpected, raises rates in December. 

What You Can Do Now

Ultimately, energy prices, the “price” of money and global realization that growth will never be the same again, will impact investors dramatically in the next year or two. There is a very good chance in my opinion that the large companies in the stock market follow the small and midsize companies down, resulting in a loss of 20-30% by the S&P 500, maybe more. 

So far in 2015, the stock market is up about 2%, despite there being more new stock price lows than highs. In fact, about 98% of the stock market gains come from only the biggest 50 stocks in the market, including many technology companies. The rest of the market, nothing. That’s a very 1999 occurrence. We all know what happened right after the party of 1999.

I think it is important that investors get rid of certain large cap investments, as well as, add some energy exposure. I also think getting ready emotionally to invest after whatever correction comes is very important.

The world is changing, fast. There is a lot of money to be made (solar, natural gas, certain technology…), but also a lot of money to be lost (coal, utilities, certain industries…). Having a clear view of the changing world and being emotionally secure could make the difference between retiring and not retiring for a lot of people. 

In September, I wrote for MarketWatch of the Wall Street Journal network that the “Bear Market Had Begun.” I followed that up with a special report of the same title at my website. Here is a link to that important report in case you haven’t seen it: The Bear Market Has Begun

I have been lucky to get to meet and become connected to some of the brighter minds in finance. I try to put that information out there for folks to use. To learn more about what I am thinking, read my columns on Marketwatch.com.

Kirk Spano

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