Oil Prices & Rates Drop; Why Nobody Can Predict Anything!

The oil markets reminded us today that they influence … everything.

High oil prices cause recessions (see the 1970s), foster wars because they subsidize them (see Russia today) or make land worth fighting for (see the Middle East since WWI), prop up illegitimate regimes (Venezuela is a great example), influence inflation, and push up interest rates.

The AI race will likely be won or lost on affordable energy prices too.

Rates fell today on news of possible diplomatic talks between the U.S. and Iran and news that oil shipment volume has been higher than analysts thought.

Both of those developments were largely unexpected – and that is the point of this blog and it is a point that I make repeatedly.

There are far too many unknown and new variables (nobody has ever dealt with) to make predicting rates or anything else possible.

Below are some of the things that can and will influence interest rates – in either direction.

So, yeah, the majority of analysts are predicting “higher for longer” because of inflation concerns, but things can change on a moment’s notice.

1. Pandemics. Remember that COVID thing? It came out of nowhere, and rates plummeted by as much as 1.5%.
2. AI. We’ve seen technologies like PCs and the internet foster tremendous efficiencies and reduce costs – helping control inflation. AI will have a similar effect.
3. Trade Wars. Cheap Chinese imports have done more to control inflation than anything the Fed ever did. Trade wars and tariffs will likely offset that effect.
4. Record Levels Of Government Debt – Worldwide. Not just the U.S., but most major developed countries have unsustainable debt levels.
5. Declining Birth Rates and Populations. This impacts wages, economic growth, and the availability of capital for investment, e.g., boomer savings financed a major portion of U.S. economic growth.
6. Record Levels Of Private Debt/Credit Crises. America’s consumers, corporations, REITs, and major funds have never been so leveraged – and sooner or later we’ll have to pay the piper. But – we don’t hold a candle to China.
7. The Fed/Treasury Put. The Fed and Treasury have shown a willingness to bail out crashing sectors time and again, with 2008 being the best example (when banks, Fannie, Freddie, and even GM were all bailed out. The Fed bailed out banks again after COVID. And investors invest with bailout expectations.
8. China And India. These huge countries are playing a larger and larger role in the world economy and will increasingly influence macroeconomic events in the future.
9. Japan. They have currency issues that could blow up the carry trade (borrowing cheap Japanese money and investing it overseas) – creating massive repercussions for U.S. and the world.
10. Quantitative Easing – Where The Fed Buys Bonds/Assets To Prop Up Prices. This greatly distorts markets and did not exist in the U.S. prior to 2008.
11. An Overvalued Stock Market. The stock market has never been this high relative to the GDP (currently at 236% per the Buffett Ratio). It was only at 140% at the peak of the Dotcom bubble.
12. Passive Management. This is HUGE. 30 years ago, about 5% of the stock funds were managed passively by index funds that simply buy or sell automatically to match an index (e.g. S&P 500) as money comes into the funds. Today, over 50% of stock funds are “passively managed.” This makes the entire stock market extremely precarious – if those funds ever start to sell en masse.
13. Wars. These have always been a factor. Traditionally, wars push rates down (“flight to safety”). But Iran and Ukraine have been pushing rates higher because of the impact on oil prices.
14. Drones. I blogged about this several months ago, but nobody expected Ukraine to be able to drone Russian oil facilities even a few years ago. Ukraine now seems to be able to hit them at will – significantly influencing oil prices.
15. Recessions. Recessions can come out of nowhere – resulting in rate drops.

I am sure I am missing many things here, but my point remains: we live in unprecedented times and nobody can predict anything (other than the fact that I will likely repeat this blog in about three months).