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A Strong Dollar And A Weak Oil Price Could Trigger A Stock Market Melt-Up

This article is more than 9 years old.

U.S. equities could well outperform the rest of the world on the expectation that the U.S. is about to surpass Saudi Arabia as the globe's largest oil producer. Miracle of miracles never to be dreamed of until today. And OPEC, which quadrupled oil prices in 1973 and threw the world into a deep recession has seemed to incredibly abandon its cartel power. This benign scenario is the combined result of cheap oil reducing inflation to near zero. That would mean a longer period of zero interest rates, benefiting stocks over bonds, as the pressure on central banks to raise rates more or less evaporates. In the meantime a stronger dollar means emerging market stocks will be weaker than U.S. stocks.

Cheaper oil is bullish for the American economy on so many grounds. It reduces our trade deficit, underpinning the rise of the dollar. It drastically reduces the cost of fuel for automobiles, trucks and airplanes. It widens the profit margins of any manufacturer needing to use petroleum additives in its product processing. It cheapens the cost of fertilizer, the essential feed-stock for growing food and could make wheat, corn, beef, pork and more of lower cost at retail.

On the downside, this fall in the price of oil is very bad news for oil exporters who depend on revenues from energy production to run their states. More broadly, the price declines can be viewed as predicting a slowdown in total global economic growth. I was nonplussed by the Conference Board's prediction that China's rate of growth would fall to the 4% level by 2020, which, if accurate, will be a drag on economic activity in southeast Asia. That would be equal to the third quarter in the U.S., estimated at 3.9% last week.

I'll repeat myself for emphasis. A falling oil price is bullish for the dollar. A falling oil price could be beneficial for corporate profits especially inside the U.S. Falling oil prices will boost discretionary income just as it removes upward pressure on inflation. The expectation of the coming replacement of Saudi Arabia by the United States as the world's leading oil producer is bound to be seen as massively bullish. Wake up from the 40 year nightmare of being victimized by the OPEC cartel. Incredible. What's more that old curmudgeonly charge about the major oil producers as squeezing ordinary Americans could be by the wayside for the moment. And what will be the ramifications for global warming and alternative fuels? All that remains to be seen.

The price of oil has fallen for nine straight weeks, the longest losing streak for black gold since 1991. And the move downward has to be taken as a prognostication of weakness in the global economy for the coming year of 2015.

It is a negative for oil revenues flowing into the major producers like OPEC. For Russia "the trend "puts the Russian economy in danger of becoming severely depressed," according to TFC Financial Counselors of Boston in their November 12th market update.

It is a negative for the pace of development in the US fracking industry where the margin between cost of producing and market prices have been severely narrowed by the 30% drop in crude prices since the early summer.

Still, it is a net positive for the near term American economy as a whole as it leaves more disposable cash in consumers' pockets due to the price of gasoline dipping below $3.00 a gallon. It is also a positive for industries that use petroleum products like the airlines coming into the holiday season and manufacturing industries that use petroleum by products in their plants like the chemical and plastics businesses.

It is a negative for investors in energy shares where equities will continue to reflect the weakness in the natural resource. It  could be that prolonged weakness will lead to takeovers of some oil producers as weak prices become a stimulus for more concentration in the oil and gas industry as we have witnessed in the past.