Buttonwood makes the classic error in “Blessing in disguise”:
WHEN Winston Churchill, having led Britain to victory in the second world war, was defeated in the 1945 general election, his wife Clementine remarked that it might be “a blessing in disguise”. If so, the great man replied grumpily, it was “very well disguised.”
Could the same be true of yesterday’s market sell-off? Some investors were arguing the case yesterday. Eric Lonergan of M&G, an investment firm, tweeted that
Falling yields and oil price (are) far more of a stimulus than recent data is negative. Expect growth momentum to improve.
Certainly, lower oil prices are a tax cut for western consumers. Although, of course, the result is an income loss for oil producers, the marginal propensity to consume of consumers (as it were) is higher and this helps demand. Rising oil prices have been a harbinger of recession, whether in 1973-1974, 1979-1980 or 2007. Lower government bond yields are a help, to the extent that they also bring down corporate borrowing costs.
Isn´t it confusing? Oil prices fell because oil demand fell due to contracting economic activity. So it´s not at all like a tax cut! In the 2000s, prior to 2008, oil (and commodity) prices were rising AND the world economy was booming. Is that like a tax hike or reflects greater oil demand?
In the 1970s, oil prices were rising because oil supply was constrained. That felt like a tax increase, so economic activity contracted.
Falling yields were also a reflection of falling NGDP growth expectations, and therefore cannot be a source of improvement in “growth momentum”!
Circular logic gets you nowhere!