Some people are just impossible to please. With oil prices headed towards the $50 threshold (and that’s just the start off this massive decline which will probably bottom out around $35), private equity booming, IPO markets up across the world and tech staging a massive comeback, there are still those who aren’t satisfied right now.
Hugo Chavez’s “socialist revolution”, the threat of North Korea, more troops headed out to Iraq, even – unbelievably – a declining oil price: the list goes on of negative indicators market bears are conjuring up as reasons to be pessimistic about the outlook for 2007. It’s time to dispel the myths and the bears which tout them like second-hand concert tickets.
First of all, Chavez’s socialist Venezuela is nothing new, and although high on the U.S. republican administration’s worry-list, that’s about all it is – political propaganda. In fact, in the cases of surrounding Latin American countries, whether the Bush administration wants to admit to it or not, Chavez’s heavy-handed administering of the country’s oil market has provided the much-needed economic reprise for these countries to get their finances in order. Argentina fared dismally when exposed to the distinctly one-sided battle with powerful American market capitalism only a decade ago - trade with Chavez’s Venezuela over the past year has put some money back into the cavity made by traders from New York and London back then; Cuba finally has a trading partner rich enough to strike something resembling a good deal with; and Bolivia, Ecuador and Brazil are all beneficiaries.
This is not to support Chavez whatsoever, but economic reality is often vastly different from its political interpretation. Richer countries are less of a geo-political threat than poorer ones, and that old adage goes for Latin America as much as anywhere else. Politically sanctimonious foreign policy from the republican administration is obsolete now the global economy is in better shape, and should be ignored.
And what about North Korea? “North Korea will not cause too much trouble for the region,” one hedge fund manager in Hong Kong told me last week. That seems to sum up the general consensus over there well. If North Korea isn’t even an issue in South East Asia, it shouldn’t be one for anyone else, either, Washington included.
In short, the political agenda which sent oil prices surging upwards for five years finally seems to be fading away as oil speculators realize that the game of crying wolf in order to justify big profits from commodities has finally come to an end.
This is not to disparage republican policy per se: most of it, such as early-century tax breaks and responsible rate handling has been economically intelligent and has brought about the liquidity the economy has needed to get to this stage of powerful growth. But it’s time to accept that the cache of war on terrorism has had its day, and like it or not, it’s become terribly passé.
The massive hit the price of oil has taken is evidence of this and it’s almost impossible to see how this is a negative thing for the economy. Sure, oil exporters like Russia, Venezuela, Malaysia and Norway will feel the negative effects, but this will only help industry there which uses oil as a cost stream rather than a revenue stream to grow over the long term. High oil prices generally mean good news for one industry, and one industry only: oil companies. By contrast, low oil prices mean good news for multiple industries. This is a good time for U.S. companies.
A low price of oil does not gel logically with the idea that countries like Iran and Iraq will become more dangerous, either. The irony was that as the “war on terror” ensued, oil prices were being pushed up as a result, empowering the military in those places who relied on a big price in the black liquid to fund their expensive guerilla wars. Low oil prices can only mean less power to those perceived as global threats.
Most of all however, the extra capital most major corporations who see oil as a cost will now have more money to play with, which means more money to invest, which means a stronger economy and a stronger market. 2007 is set to rock and roll for U.S. markets, and it’s high time this was made the focus of the republican administration.
Otherwise, just as with his father before him, President Bush risks handing all the republicans’ economic success over to the democrats. And, just as with investors in the 1990’s, investors this time round will wait until the point where another bubble is about to burst before joining in the big gains of a surging market.
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