Oil Price Drop Bonanza?

No not these Talking Heads. A lot of the talking heads on television are making a big deal out of the oil price drop. It is a big deal, but not for the reason they think. 

Here is Forbes' "take" on this:

Domestically, lower energy prices means more money for discretionary spending. The equivalent effect on the US economy is a tax cut for consumers on the order of $100-125bn. Think about how low gasoline prices are now compared to where they were a few months ago. This saving generally translates into higher consumption on other things like retail spending. For airlines, this will be awesome because the cost of fuel and flying decreases, the effects of which may be passed on to consumers. Net-net, analysts estimate higher consumer spending should boost US GDP by .4%-.5% over the next year. This will be balanced by lower domestic energy production, however.

The last sentence is what I want to focus on. In general, a drop in a commodity price is a "zero sum game." 

In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). If the total gains of the participants are added up and the total losses are subtracted, they will sum to zero. Thus cutting a cake, where taking a larger piece reduces the amount of cake available for others, is a zero-sum game if all participants value each unit of cake equally (see marginal utility).

In other words, the winners and losers balance out. 

Who Benefits? 

Oil Production 2004: Because of Shale Oil, the US would be much larger now.

Internationally, Asia (except Indonesia), and Western Europe (except Britain and Norway), will have a rather substantial increase in net income. Russia, Nigeria, Venezuela, Saudi Arabia, and all oil producers will be hurt traumatically. The US, since it is a major oil producer, will benefit and be hurt, depending on where you live and who you are. The US currently imports about 1/4 of its oil needs. Thus there will be a net benefit for the US.

Personally it will be a quite large net benefit, as I spend about 12 hours a week in the car driving. In addition the area where I live will be a beneficiary of lower gas prices as it is a tourist destination for the greater Los Angeles area. Also I  may buy some Russian real estate as the price of it just dropped by 60% from my perspective as a dollar-oriented person. As Baron Rothschild once said, "Buy when there is blood in the streets." 

Although there is a lot of buzz in certain circles about how bad things will be in 2015, I do not agree. A habitual "bear" will be correct a few times a decade, since that is the number of times the market declines in a decade. Never underestimate the power of the state to prop things up. So my view has not changed in the blog's hiatus. Things will be moderately good for a couple  of years, I do not see how the current situation can continue, and as Herb Stein said, if something can't continue, it won't. The oil price drop adds instability to the system.

Get ready.

Will Housing Decline?

Joshua Pollard, the former head of Goldman Sach's housing research department during the 2008 real estate crash, thinks that homes are headed for a decline:

3 Stages of the home price decline

Unless the calculus of history is a poor guide, there is a 60% chance that home values decline materially, in fact, the correction is already underway. This probability rises when new negative shocks emerges. The home price decline will be defined by 3 Stages:

Stage I: Hot to Cool: Active since Summer 2013*, Price growth is slides across the country as flippers lose money outright in the red-hot investor markets (NYC, San Francisco and Las Vegas); New home absorption rates - sales per community - are declin; investors slow their home purchases; total home sales decline year over year; developers lose pricing power, press outlets shift from positive to mixed about the health of the housing market.

Stage II: Demand to Supply: Small shocks convert demand pools into supply ripples. A first wave of investors begin trimming prices to get ahead of future declines; discounts increase to incentivize purchasers as purchasers increase their delays for better deals; developers reduce land budgets as cancellations tick up; major financial press outlets take a more negative tone toward housing lowering confidence overall.

Stage III: Deflation & Response: Falling home prices create a negative deflationary feedback loop that foreshadows a once-in-a-lifetime policy response. Deflationary economics take full hold; leveraged bets on real estate unwind in quarterly ripples due to the public reporting cycle & asset manager redemption schedules; willingness to lend shrinks; the broader consumer finally understands it is a bad time to buy a home, a shrinking housing market negatively impacts jobs causing recession; the estimated effects of never-before-seen public policy reactions determine when and where prices eventually trough. 

Note that Pollard is trying to start some new sort of project. 

While I did not perceive it in the summer of 2013, I do see the beginning of a decline now. Prices have once again reached the silly levels of 2008. I noticed a house in San Diego, a simple three bedroom house in an older area. It sold for $400,000. As someone raised in San Diego, I am in the common situation of being unable to afford to buy any of the houses I grew up in. Here is the Zillow estimate for the cheapest one of them: La Jolla Home. 

$1.2 million for a simple 3 bedroom house. 

As Herb Stein famously said, if a situation can't continue, it won't continue. 

Can You Reduce Your Debt?

Can you reduce your debt? I have been trying for years and have finally got my debt considerably reduced. I am not where I want to be—yet. 

Why is this important?

The economy is currently not that bad, but the effects of good economic results are quite spotty. There is still a large overhang of future problems building slowly. Interest rates will go up, and that means prices of investments and residential property must go down. On a purely subjective basis it seems that we have a few years of sideways movement in economy activity. But even though I think a crisis is coming, I feel that the US will "weather the storm" better than most countries.  

While I am not a fan of economic collapse blog, I agree with this point strongly: 

The U.S. National Debt Has Grown By More Than A Trillion Dollars In The Last 12 Months 

The idea that the Obama administration has the budget deficit under control is a complete and total lie.  According to the U.S. Treasury, the federal government has officially run a deficit of 589 billion dollarsfor the first 11 months of fiscal year 2014.  But this number is just for public consumption and it relies on accounting tricks which massively understate how much debt is actually being accumulated.  If you want to know what the real budget deficit is, all you have to do is go to a U.S. Treasury website which calculates the U.S. national debt to the penny.  On September 30th, 2013 the U.S. national debt was sitting at $16,738,183,526,697.32.  As I write this, the U.S. national debt is sitting at $17,742,108,970,073.37.  That means that the U.S. national debt has actually grown by more than a trillion dollars in less than 12 months.  We continue to wildly run up debt as if there is no tomorrow, and by doing so we are destroying the future of this nation. 

Debt is not going down. The statistics you read are not reliable. Another crisis is coming. 

Do not be like the typical person that has zero savings, or even worse, the savings they do have are less than their credit card balances.  If you have credit card debt, make it your highest priority to pay it off. There is nothing you or I can do about the overall economic situation, but on a personal level we can get ready.

Are you ready? 

Excellent Interview on Economics

David Stockman

While I am not expected a collapse, a crisis is in our future.