As I write this, the world is in flux.
It always is, but things have taken an unusually strange turn in Russia, North Korea and the crude oil markets.
Let’s start with oil prices. They recently hit levels not seen since 2009.
On the positive side, oil going to $55 a barrel and below helps the U.S. consumer. In 13 U.S. states, gas can be found for under $2 a gallon. Economists estimate these lower gas prices act like a $60 billion dollar tax cut or stimulus. That means more money in individuals’ pockets for holiday presents, travel, savings and food.
Consumer spending is approximately 70% of U.S. GDP (which is skewed by healthcare costs) so room for growth in this area is a huge positive for U.S economic growth. Lower gas prices also help some U.S. industries, like airlines, delivery services (think UPS) and paint companies through lower raw material costs and energy costs.
Federal Reserve Chief Janet Yellen reiterated these positives in her Fed statement on Wednesday. The U.S. is still a net importer of oil and that adds to the positive nature of lower prices. Unfortunately, the stock markets were shaken by the steep drop in oil as the commodity has fallen over 40% this year.
One driver of growth in the U.S. has been the shale oil industry, which created jobs and great earnings, and thus helped pull us out of our economic crisis. This vibrant part of our economy will face serious headwinds with prolonged cheap gas. With extended low interest rates and cheap money, typically inflation is a chief concern. The problem is that everyone is now concerned with deflation. The threat of deflation could derail a rise in interest rates and soften our economy just as it was getting a good head of steam.
The drop in crude has also weakened an already sanctioned Russia. The Russian Ruble has lost 45 percent of its value against the U.S. dollar this year and is the worst performing currency in the world for 2014. Inflation in Russia is running at an estimated 10 percent. With deep economic sanctions against Russia taken by various countries, including the United States, the country was already feeling the pain.
With half of Russia’s government revenue coming from oil and gas exports, low oil prices continue to put recessionary pressure on the country and weaken the currency. Vladimir Putin, Russia’s dictator- um, I mean President- announced it could take two years to pull the country out of its economic downturn but his estimate is based on the expectation that demand for Russian oil returns.
For now, Putin is backing Russia’s banks and working to strengthen the ruble in response to the crisis. However, a default in Russian debt would injure a weak Europe and could spread to emerging markets. A worst-case scenario would be if Putin tries to distract from economic woes through further military actions.
How did an American comedy lead to a cyber-attack on a major studio and a communist country interpreting an ‘act or war’? Let’s start with the obvious. North Korea’s leader, Kim Jong-un, doesn’t have a sense of humor. The film in question is Sony’s “The Interview,” starring self-proclaimed stoners, Seth Rogan and James Franco.
In the movie, their characters are asked by the CIA to kill Kim Jong-un during while conducting an interview with him. North Korea’s initial reaction to the first trailer for the movie was a letter to the White House stating that the film was terrorism and an ‘act of war.’
Recently, Sony was cyber-attacked and embarrassing emails were leaked. The unidentified culprit looks to be North Korea. Finally, terrorist threats to theaters showing the movie caused the cancellation of the movie’s Christmas day release.
Sony and those theaters were put in a difficult position. The thought of anyone dying over a movie’s release is not a choice many would want to make. While many are lambasting “The Interview’s” cancellation given the emphasis on freedom of expression in the U.S., Sony acted to protect its movie’s viewers, stars and producers.
Quite frankly, I didn’t find the movie in the least bit interesting before and had no plans to see it. Now, as soon as it comes out on video, I plan on viewing it. Any movie that can infuriate a tyrannical dictator makes me a fan. The real winner may be in the movie’s video sales and digital distribution.
Certainly, threat of war, deflation and a Russian recession could take its bite out of our economy and stock markets.
It can also create opportunities.
As Warren Buffet famously said, “I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.”
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