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Oil and the Economy

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Strong Eagle
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Oil and the Economy

Postby Strong Eagle » Tue, 06 Jan 2015 2:20 am

OK all you economic and market wizards and prognosticators. I'd like to hear your opinion on a couple of questions regarding oil and the economy.

First, how long to you think low oil prices will last? Do you think there is collusion between the US and Saudi Arabia to keep production up in order to damage the economies Russia, Iran, and Venezula?

For various scenarios (6 months low prices, 12 months, 2 years) how to you think various investment categories will play out? For example:

a) Large and mid cap stocks in the US
b) Emerging market funds
c) International business funds
d) Alternatives such as real estate, commodities, gold, etc?

I've got some investment decisions to make and naturally, the falling oil price has complicated matters... maybe for the better. I know several of you have a great deal of market experience... looking to pick your brains about the future.

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Re: Oil and the Economy

Postby Wd40 » Tue, 06 Jan 2015 4:58 am

Holy Shit! Oil has just fallen another 6%!

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Re: Oil and the Economy

Postby Strong Eagle » Tue, 06 Jan 2015 8:36 am

Maybe we need an investment subforum, because I have another question.

Why would the US federal reserve raise interest rates when that would cause the interest rates on US Treasury bonds to rise, which in turn would severely increase the yearly cost of financing the US deficit?

So long as the US dollar remains the investment vehicle of choice, and so long as the US has China and other large investors over a barrel if they attempt to weaken the dollar, why would the US ever raise interest rates? It's not like we have an inflation problem.

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Re: Oil and the Economy

Postby Wd40 » Tue, 06 Jan 2015 8:48 am

I am not so knowledgeable about this but from what I read, the FED was too much behind the curve in raising rates from 2004 to 2007, which finally ended in the subprime crisis. It is exactly this thing that they want to avoid. Even though inflation is low now it could shoot up fast and then interest rate increases always have a lag effect.

Rates have been kept extraordinarily low to stimulate the economy, they are only planning to normalize the rates.

http://www.reuters.com/article/2015/01/ ... 6A20150105

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Re: Oil and the Economy

Postby PNGMK » Wed, 07 Jan 2015 9:18 am

To me and my colleagues.... the oil price is being pushed down to bankrupt Putin... I think Oil has to be greater than $75/BBL for Russia to run on an even keel..... however in the last OPEC meeting it did not appear that the Russians were arguing for production quota cuts... so yes - it's confusing.
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Re: Oil and the Economy

Postby Barnsley » Wed, 07 Jan 2015 9:53 am

PNGMK wrote:To me and my colleagues.... the oil price is being pushed down to bankrupt Putin... I think Oil has to be greater than $75/BBL for Russia to run on an even keel..... however in the last OPEC meeting it did not appear that the Russians were arguing for production quota cuts... so yes - it's confusing.


Its not just the Russians, I think every country that has based its entire economy on Oil exports is feeling the pinch.

All those Billions trousered by the Government officials, nobody notices when its $100 a barrel , sadly for them its not the case now.
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Re: Oil and the Economy

Postby nakatago » Wed, 07 Jan 2015 10:11 am

One unverified story I heard was Saudi Arabia lowered the price of their oil because the US is starting to become serious competition.

I didn't really think about it much except for, "...that's an amusing thought."

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Re: Oil and the Economy

Postby Barnsley » Wed, 07 Jan 2015 10:32 am

nakatago wrote:One unverified story I heard was Saudi Arabia lowered the price of their oil because the US is starting to become serious competition.

I didn't really think about it much except for, "...that's an amusing thought."


I read an article yesterday that something similar to this was done by the Saudis in the 80's when there looked to be a push to alternative energy sources and more efficient cars.

They flooded the market with oil to make it cheap and to curtail the investment in alternative energy sources and more efficient cars.

The article stated though that the world has changed since the 80's and the conditions are not the same and the Saudis will not get the same result this time, in that they reclaimed all the market again.
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Re: Oil and the Economy

Postby x9200 » Wed, 07 Jan 2015 10:35 am

Barnsley wrote:
PNGMK wrote:To me and my colleagues.... the oil price is being pushed down to bankrupt Putin... I think Oil has to be greater than $75/BBL for Russia to run on an even keel..... however in the last OPEC meeting it did not appear that the Russians were arguing for production quota cuts... so yes - it's confusing.


Its not just the Russians, I think every country that has based its entire economy on Oil exports is feeling the pinch.

All those Billions trousered by the Government officials, nobody notices when its $100 a barrel , sadly for them its not the case now.

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Re: Oil and the Economy

Postby JR8 » Wed, 07 Jan 2015 11:02 am

Strong Eagle wrote:First, how long to you think low oil prices will last? Do you think there is collusion between the US and Saudi Arabia to keep production up in order to damage the economies Russia, Iran, and Venezula?


Until the Russian economy collapses and Putin gets ousted, and someone more aligned with the other global powers and global interests replaces him?
I don't know, but I have been reading some interesting op-ed pieces recently.
... Russia funding Iran, Iran posing a growing threat to SA
... SA/US directs OPEC to unleash oil production to put the heat on Putin
That seems to be quite a common view, and the Rouble is certainly being crushed.
Venezuela, I don't know. But they seem to have a history of being rewarded for misbehaviour for the sake of overall group consensus.


Strong Eagle wrote: For various scenarios (6 months low prices, 12 months, 2 years) how to you think various investment categories will play out? ...


My own approach on that, is that that would be a full time job and even then there'd be a good chance I'd be wrong. So I accept I don't know, and realistically have no way of doing so. The same applies equally to bankers/analysts, so I'm damned if I'm going to pay them fees to make similar decisions for me.

I invest in what might be considered a Blue-chip portfolio. It's by no means exciting but at the end of the day it is the Tortoise who beats the Hare, and investing for a pension and 'exciting' are polar opposites :). There are guidelines/metrics to identify candidates, company capitalisation, dividend cover (i.e ratio of earnings/div paid), stability and reliable growth of said dividend, and one or two other criteria. The aim is to select big solid, reliable, performers, and 'invest and forget'. If you have say a total of 20 stocks then the Oil sector might be down, but Airlines/Travel might be up. I.e. To some extent the portfolio internally hedges itself across sectors as they move in and out of favour. Of course if the economy as a whole takes a beating the capital value might well drop. But, the point is that doesn't ultimately matter, next week or next year there might be a compensating rally, in the scheme of things it matters not, you should still be receiving the same progressively rising dividend income.

It's not an uncommon approach. And since the dawn of the web the ability of individuals to research and discuss such things, and effectively DIY their pension has become a realistic option. You'll see many iterations of it, just try googling on something like 'DIY high yield stock portfolio' (I haven't tested that BTW, but it should, probably, yield something of interest!).

Or have a look at what Berkshire Hathaway are saying and doing this year. What are their core positions, might buying a holding of them (or indeed a slice of BRK itself), simply meet your needs?


---Here are a couple of 'current thinking/outlook' articles I was reading earlier this morning...
- http://www.digitallook.com/news/market- ... 38935.html
- http://www.digitallook.com/news/interna ... 38975.html

The first article especially has me thinking I might want to pull my horns in a bit. Something to ponder. I had been thinking this new year, with Russia, Oil and EU/Greece being established known issues, things might be looking up, but so far signs of that seem distant...
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Re: Oil and the Economy

Postby louise.honner » Wed, 07 Jan 2015 12:01 pm

I definitely don't think it is a plot to bring down Putin or a ploy by the Saudis to slow down US shale gas. It's also in no one's interest to further destabilise Venezuela or any other country with heavily subsidised fuel.
Here is a good article on the Saudi issue: http://www.rigzone.com/news/oil_gas/a/1 ... y/?all=HG2

Oil has been at an artificial high lately and if you look back over the last 40 - 50 years you will see it at a much more realistic average.

If you work in the industry you will know that it is very cyclical and will rebound within, I reckon, the next 2 years but certainly not in the short term.


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Re: Oil and the Economy

Postby Strong Eagle » Wed, 07 Jan 2015 12:52 pm

Thank you, JR8, and others, for your considered response. I've still got decisions to make, other inputs welcome.

Cheers.

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Re: Oil and the Economy

Postby Wd40 » Wed, 07 Jan 2015 2:34 pm

India is supposed to be in a sweet spot with growth about to return with a stable govt and oil prices falling, is like India just won a jackpot! The next 4 years markets are going to double, is the minimum expectation and the rupee is also going to be stable.

I am waiting for a good entry point to increase my allocation to Indian Equity Mutual Funds. I can understand why JR8 is concerned about paying fees to fund managers, his markets annual returns expected are like 4% a year, so its hard to give 1% to the fund manager. But when markets are expected to grow 20% CAGR, its okay to give 1%, let them also make a living :)

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Re: Oil and the Economy

Postby Wd40 » Wed, 07 Jan 2015 2:41 pm

I dont understand one thing, why are these developed markets so worried about deflation due to lower oil prices? They can easily fix it by increasing the taxation on retail pump prices such that consumers dont get to enjoy the low prices, in this way there wont be deflation and at the same time the gahmen can get valuable tax revenue which can then help them improve their screwed up balancesheets. This is exactly what India is doing.

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Re: Oil and the Economy

Postby sundaymorningstaple » Wed, 07 Jan 2015 3:09 pm

Yeah, but India is also gang-raping tourists as well, so it doesn't make it necessarily right. :-k


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