FINANCE
The Market Meltdown Explained
by Diego Jasson
2016-03-11 08:00:00
John Maynard Keynes once quipped, “The markets can remain irrational longer than you can stay solvent.” His wisdom is painfully true for oilmen across America and nations across the Middle East.

John Maynard Keynes once quipped, “The markets can remain irrational longer than you can stay solvent.” His wisdom is painfully true for oilmen across America and nations across the Middle East.

The odd market behavior is best illustrated with Great Value Reduced Fat 2% Milk at Walmart. A barrel of this cheap milk, equivalent to 42 gallons, would cost $76.02. A barrel of West Texas Intermediate crude oil on the New York Mercantile Exchange, on the other hand, closed at $29.83 on Monday, January 25, 2016, up from its low of $26.55. Last June, however, oil was trading around a $105.

Why the huge decline in price? The men and women at the World Economic Forum in Davos this January cannot seem to agree why. In late August, markets began to tumble in a rout which had traders calling the end of the current bull run. The Dow Jones Industrial Average, a weighted index of so called “Blue Chip” firms that include behemoths like Apple and JPMorgan Chase & Co., dropped from $17,545 to $15,666 in the span of a week.

As the year came to a close markets rallied and regained the lost market capitalization, going flat for the year. With 2015 being labelled as the year when markets went nowhere, worries began to bubble in markets internationally. Chinese growth was disappointing to analysts, and manufacturing was contracting. With Chinese expansion slowing, the metals and other materials enabling the growth, known as commodities, began to lose value in a violent and brutal rout. At the same time, sanctions began to be lifted on Iran, the American ban on oil exportation was lifted by congress driving the West Texas Intermediate crude oil benchmark (American oil) price to near parity with the Brent benchmark price (International oil). Meanwhile, shale gas produced by fracking continued to produce tremendous amounts of oil, and the Organization of Petroleum Exporting Countries (OPEC), a cartel of Middle Eastern countries, refused to cut production in a game of chicken with the American shale men.

With Iranian oil seemingly ready to flood international oil markets, OPEC suffering losses in the hope that competitors would go bust first, and fracking continuing to fill barrel after barrel, the price of oil nose dived. Mental barriers were shattered as the price of oil tore through thresholds: 50, 40, and then finally 30 dollars.

Stock markets internationally, with the exception of the Dow Jones, began to enter Bear markets, defined as a 20% decline from the last high price. As Chinese growth triggered a collapse in Chinese stock prices, the government reinstated its policy of ‘circuit breakers’ which halted trading for 15 minutes after a 5% intraday decline in price, and cease trading for the day after a 7% decline. This illiberal policy seemed to only fuel market anxiety, and after a few days, the government retracted the rule. The wavering Chinese intervention in the marketplace, whether it be by prohibiting the sale of certain assets or government purchasing of assets in an attempt to stabilize prices, fueled mistrust in Chinese markets and prospects. International markets began to slide fearing the slowdown and are uncertain of the pace of European and American monetary policies’ divergence.

Emotional traders began to sell. Institutional investors began to sell. Markets panicked, driving the prices of stocks down for the worst ever start to a new year, with 3 weeks of declines in prices. Most pundits pointed out the American economy’s strong underlying fundamentals as not justifying the market meltdown. Yet other things are strange in the world of economics right now. When prices of oil decline, average Americans have more money in their pockets and therefore are more disposed to increase spending, stimulating the economy. Americans, however, have so far saved the money, reluctant to spend. Eventually, they hope, markets will regain their sense. With oil companies like BP slashing investment, investors waiting to prey on failing oil companies, and oil storage under capacity making oil tanker storage feasible, some think it won’t be long before oil regains some of its value. Likewise, with the European Central Bank expected to further push negative interest rates down and with the American economy continuing to do well, optimists see another phase of the bull run as eminent.

But as of right now, just enjoy 30 dollars a gallon oil. It may not be around for a long time.



The Market Meltdown Explained

John Maynard Keynes once quipped, “The markets can remain irrational longer than you can stay solvent.” His wisdom is painfully true for oilmen across America and nations across the Middle East.

The odd market behavior is best illustrated with Great Value Reduced Fat 2% Milk at Walmart. A barrel of this cheap milk, equivalent to 42 gallons, would cost $76.02. A barrel of West Texas Intermediate crude oil on the New York Mercantile Exchange, on the other hand, closed at $29.83 on Monday, January 25, 2016, up from its low of $26.55. Last June, however, oil was trading around a $105.

Why the huge decline in price? The men and women at the World Economic Forum in Davos this January cannot seem to agree why. In late August, markets began to tumble in a rout which had traders calling the end of the current bull run. The Dow Jones Industrial Average, a weighted index of so called “Blue Chip” firms that include behemoths like Apple and JPMorgan Chase & Co., dropped from $17,545 to $15,666 in the span of a week.

As the year came to a close markets rallied and regained the lost market capitalization, going flat for the year. With 2015 being labelled as the year when markets went nowhere, worries began to bubble in markets internationally. Chinese growth was disappointing to analysts, and manufacturing was contracting. With Chinese expansion slowing, the metals and other materials enabling the growth, known as commodities, began to lose value in a violent and brutal rout. At the same time, sanctions began to be lifted on Iran, the American ban on oil exportation was lifted by congress driving the West Texas Intermediate crude oil benchmark (American oil) price to near parity with the Brent benchmark price (International oil). Meanwhile, shale gas produced by fracking continued to produce tremendous amounts of oil, and the Organization of Petroleum Exporting Countries (OPEC), a cartel of Middle Eastern countries, refused to cut production in a game of chicken with the American shale men.

With Iranian oil seemingly ready to flood international oil markets, OPEC suffering losses in the hope that competitors would go bust first, and fracking continuing to fill barrel after barrel, the price of oil nose dived. Mental barriers were shattered as the price of oil tore through thresholds: 50, 40, and then finally 30 dollars.

Stock markets internationally, with the exception of the Dow Jones, began to enter Bear markets, defined as a 20% decline from the last high price. As Chinese growth triggered a collapse in Chinese stock prices, the government reinstated its policy of ‘circuit breakers’ which halted trading for 15 minutes after a 5% intraday decline in price, and cease trading for the day after a 7% decline. This illiberal policy seemed to only fuel market anxiety, and after a few days, the government retracted the rule. The wavering Chinese intervention in the marketplace, whether it be by prohibiting the sale of certain assets or government purchasing of assets in an attempt to stabilize prices, fueled mistrust in Chinese markets and prospects. International markets began to slide fearing the slowdown and are uncertain of the pace of European and American monetary policies’ divergence.

Emotional traders began to sell. Institutional investors began to sell. Markets panicked, driving the prices of stocks down for the worst ever start to a new year, with 3 weeks of declines in prices. Most pundits pointed out the American economy’s strong underlying fundamentals as not justifying the market meltdown. Yet other things are strange in the world of economics right now. When prices of oil decline, average Americans have more money in their pockets and therefore are more disposed to increase spending, stimulating the economy. Americans, however, have so far saved the money, reluctant to spend. Eventually, they hope, markets will regain their sense. With oil companies like BP slashing investment, investors waiting to prey on failing oil companies, and oil storage under capacity making oil tanker storage feasible, some think it won’t be long before oil regains some of its value. Likewise, with the European Central Bank expected to further push negative interest rates down and with the American economy continuing to do well, optimists see another phase of the bull run as eminent.

But as of right now, just enjoy 30 dollars a gallon oil. It may not be around for a long time.