PeakTrader.com Forum Index PeakTrader.com
Economics, Portfolio Optimization, and Technical Analysis
 
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister 
 ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 
Log inFast Charts

Lower Oil Prices - Bill Gross

 
Post new topic   Reply to topic     PeakTrader.com Forum Index -> Articles
View previous topic :: View next topic  
Author Message
administrator
Site Admin


Joined: 28 Dec 2005
Posts: 11965

PostPosted: Mon Dec 22, 2014 11:52 pm    Post subject: Lower Oil Prices - Bill Gross Reply with quote

JH:

The average U.S. retail price of gasoline right now is about $2.40 a gallon. Last year American consumers and businesses bought 135 billion gallons of gasoline at an average price of $3.60 a gallon. If gasoline prices stay where they are and if we buy the same number of gallons of gasoline this year as last, that leaves us with an additional $160 billion to spend over the course of the year on other items.

---

PeakTrader:

It’ll raise real income and generate demand.

The economy needs a self-sustaining consumption-employment cycle (where consumption generates employment and employment generates consumption, etc.).

It’s uncertain if lower oil prices are powerful enough, and long-lasting, to spur that cycle.

We also needed a large tax cut, substantial deregulation, and gradual minimum raise increases.

****

Meant gradual minimum wage increases.

---

EconStudent:

This leads me to a question I’ve never seemed to have received a decent explanation to. Inflation is wages& prices going up, what’s the problem? I can understand the aversion from the consumer’s perspective if it’s only goods & services with wages stagnant.

---

PeakTrader:

It’s about nominal growth = real growth + inflation.

There’s the Keynesian concept of “sticky prices” with deflation, i.e. prices may not fall enough to maintain real growth.

And, some inflation provides a “buffer” for monetary policy to promote growth.

Moreover, it’s important to facilitate “animal spirits” through price stability.

Here’s a Bill Gross interview from Jan ’07:

Bloomberg’s Tom Keene: “…As you know, I’m a big fan of nominal GDP – this, folks, is real GDP plus inflation. It’s the ‘animal spirits’ that’s out there. You say be careful, Bill Gross. It looks real good to me, Bill. I see 6% year-over-year nominal. You say that’s going to end?”

Pimco’s Bill Gross: “…Ultimately, the inflation component affects the real growth component. To the extent that you have nominal GDP – in my forecast 3 to 3.5%, that’s really not enough growth in terms of the economy itself to support asset prices at existing levels. And so, declining asset prices ultimately factor into eventually lower real growth. But that’s not for mid-2007 but perhaps for later in the year.”

Tom Keene: “When we look at six months of low nominal GDP, is that enough to link directly into the ‘animal spirits” of the business investment component of GDP – the “animal spirits” of business men and women?”

Bill Gross: “Well sure it is. When you realize that the average cost of debt in the bond market – and therefore in the economy and this includes mortgages – it is about 5.5%. If you can only grow your wealth and service that debt at 3.5% rate, then that has serious implications.

When you go back to 1965, Merrill [Lynch] did this study – in terms of asset prices during periods of time when nominal growth grew less than 4%. Risk assets have been negative in terms of their appreciation and actually bonds have done pretty well. The question becomes why hasn’t that happened yet, and I think we’re simply in a period of time where there are leads and lags that are much like the leads and lags of Federal Reserve policy.”

---

JH:

EconStudent: In many economic models, inflation that is perfectly anticipated works just as you describe– everybody goes about their business just as they would otherwise. One important exception is when, as now, the short-term interest rate is stuck at zero. In this environment, a fully anticipated change in inflation means a change in the real interest rate. However, my view is that the most important dimension of recent developments is that it is a relative price change that works to the advantage of consumers and to a net oil importing country like the United States, and this outweighs any other considerations. In addition, I think the psychology of this kind of change works differently from the textbook model of changes in inflation.

Real Interest Rate = Nominal Interest Rate - Inflation (Expected or Actual)

---

Ekim:

“Many people think of inflation as a condition where the cost of the goods and services they buy goes up but their wages do not. ”

With good reason. Wages tend to be sticky on the way down. Deflation tends to translate into a pay raise for Joe Average.

---

JH:

I regressed the weekly change in the natural logarithm of the crude oil price on the change in the 10-year yield and the change in the logs of the copper price and the value of the dollar using data from April 2007 to June 2014.

I then used the coefficients from that historical relation to see how much of the drop in oil prices since this summer we would have expected to observe, given the observed drop in copper prices and the 10-year yield and the rise in the value of the dollar. Even if we knew nothing on the production side of the oil market, we would have anticipated the price of oil to have fallen from $105/barrel in June to $85 dollars today on the basis of these other three potential indicators of world economic activity [actual price dropped to $57].

In other words, of the observed 45% decline in the price of oil, 19 percentage points– more than 2/5– might be reflecting new indications of weakness in the global economy.

---

JBH:

How can the estimated coefficients in a reduced form equation estimating price inflation possibly be meaningful when there are no supply variables on the rhs? It would be fine if the estimation period were limited to a six month or shorter interval where supply could be assumed to be roughly constant. But supply was manifestly not constant for the period over which the equation is estimated. Thanks in advance for your thoughts on this. I hope to learn something.

---

JH:

JBH: I believe it’s reasonable to assume that weekly changes in these 3 variables are correlated with changes in global demand for oil but uncorrelated with changes in the global supply of oil.

---

PeakTrader:

JBH, it shows the demand vector and the supply vector is implied by the difference in the oil price.

---
Back to top
View user's profile Send private message
Display posts from previous:   
Post new topic   Reply to topic     PeakTrader.com Forum Index -> Articles All times are GMT - 8 Hours
Page 1 of 1

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Powered by PeakTrader 2.0.8 © 2001, 2002