An uncomfortable Election Day quiz: Who, in the next 6 months, will have the most influence on the U.S. economy?
- Alan Greenspan, Chairman of the Federal Reserve Board.
- George W. Bush, Republican Candidate for President.
- Albert Gore, Democratic Candidate for President.
- Saddam Hussein, Despot leader of Iraq.
- Hugo Chavez, President of Venezuela and the only non-Muslim leader of an OPEC nation.
If any of us answered Greenspan, Bush, or Gore we’re probably wrong and suffer from naïve ideas about the power and independence of the U.S. economy. While who is elected President is likely to have some long-term impact on the economy, neither candidate will have much influence in the next six months. Mr. Greenspan, meanwhile, has seen at least as much irrational exuberance taken out of the economy by higher gasoline prices as by higher interest rates. It could be said that OPEC is doing his job for him.
Which leaves us with Saddam Hussein and Hugo Chavez.
I learned this reading The DeVoe Report, a regular newsletter from Raymond F. DeVoe, Jr., a market strategist at Legg Mason Wood Walker. Mr. DeVoe, who writes the most literate commentary coming from a Wall Street investment banking firm, has devoted much of his long career to showing where the economy and the markets were connected— and where they were wildly disconnected. His regular message is that investors tend to be over-enthusiastic on the upside and altogether terrifying on the downside.
So we should invest accordingly.
Mr. DeVoe’s case for the impact Hussein and Chavez can have on our economy is pretty straightforward:
- While the release of 30 million barrels of crude oil from the Strategic Petroleum Reserve last month panicked futures traders and brought prices down temporarily, it did nothing to increase the actual supply of heating oil because American refineries are operating at capacity. Worse, we now import more than 50 percent of our oil.
- Iraq now exports some 2.3 million barrels of oil a day, an amount that puts Iraq in position to have a heavy influence on oil prices. Their 2.3 million barrels a day, for instance, is more than the excess capacity of Saudi Arabia. Equally important, most of Saudi Arabia’s’ untapped capacity is high sulfur crude that few refineries can handle.
- Chavez, a self declared “social revolutionary” and President of a country that exports 3 million barrels of oil a day, wants to see oil “fairly priced.” Speaking at a summit meeting of OPEC leaders in September he asked, “What would they do without oil? Where would they be?” After that he noted that Coca-Cola was $78.80 a barrel, milk was $150 a barrel, and good wine was $1,780 a barrel, so oil at less than $40 a barrel was cheap. * Basically, some 5.3 million barrels a day of the global oil supply is controlled by leaders who have no interest in global financial stability and a passionate interest in extracting money from the industrialized nations. The most recent indicator is Saddam Husseins’ declaration, last week, that he wanted Iraqi oil to be paid for in Euros rather than dollars.
- We’ve had three mild winters in a row. Heating oil inventories in the areas that use the most heating oil (the Northeast and Northwest) are half of what they were a year ago. A cold winter could bring profound shortages.
Against this background the prevailing view on Wall Street is that both interest rates and energy prices have peaked and that we’ll soon have the uncertainty of the election behind us. Former Saudi oil minister Sheik Ahmed Zaki Yamani is even predicting oil prices as low as $10 a barrel next year.
In conditions like that we should resume our normal bull market tomorrow.
Mr. DeVoe, a defender of Murphy’s Law, believes otherwise. After today, we’ll have three months of uncertainty with transition to a new President, the start of winter, and a Christmas season that may experience the first negative “wealth effect” as shopping enthusiasm is curbed by stock market loses.
Bottom line: more wild days ahead.
Photo: Jan-Rune Smenes Reite
(c) Scott Burns, 2022