There are a few reasons why crude oil having a $20 handle is not beneficial to equity market and US investors. So while saving $2.00 on a fill up to pay for a cup of coffee seems Ok, the $2,000 you lost in your 401(k) is not.
Look at why gas is so cheap. The price of oil is being used as a weapon and the war has many fronts.
- Saudi Arabia is keeping the price low to cripple US fracking operators.
- The world’s global economy is in a recession, so usage falls as does the price.
- The strong dollar is beating up the price of crude.
In the US, this price war is having a disastrous effect on drillers, frackers and the whole infrastructure in the Midwest and Texas. The industry has lived off of junk bond funding, with large banks such as Wells Fargo along with smaller regional banks being on the hook for these now non-performing loans.
The chase for yield has many other big players in the oil patch purchasing this dubious paper. Reports say that the Dallas Fed is trying to stem this contagion by asking note holders not to force bankruptcies, but to look to consolidate the industry.
So what happens, when hedge funds, private equity funds and others see loses and the need to provide more collateral to their loans due to losses? They short equities through futures as a hedge. When that becomes to crowded a trade they sell what they can, not what they want.
The Dallas Fed has also reportedly suspended mark-to-market on the toxic paper in order to window dress the troubled firms balance sheets and help the troubled banks not have to take write downs or hold further capital against the bad paper.
This is a big part of the 11% cratering in the Nasdaq over the last two weeks as the FANGs — Facebook, Amazon, Netflix and Google — have been put on auction by the same players who ran them up.
So sip your free coffee and newspaper and look at the sports pages to see who won yesterday, but remember that free java is causing agita to your retirement fund.
If you are Lloyd Blankfein, what does it say about your firm, Goldman Sachs, that the Democratic candidates vilified — especially Bernie Sanders — you and the company directly more times than Republican presidential candidate Donald Trump?
The last thing any Goldman banker expected to hear when tuning in to the debate was the firm being put on the grill.
Also let’s clear up some history that Sanders mentioned. Bill Clinton had Robert Rubin as Treasury Secretary who was Co-Chairman and Co-Senior Partner before leaving for Washington. Rubin was instrumental in repealing in 1999 the Glass–Steagall Act and the regulations on derivatives through the CFTC.
Both these acts have a direct line to the cause of the bank crisis of 2007-2008. Upon leaving Washington, Rubin would take a leadership position with Citigroup, which benefited greatly from the repeal of Glass–Steagall.
George H.W. Bush had Hank Paulson as his Treasury Secretary. Paulson was Chairmen and CEO of Goldman prior to leaving for Washington. Paulson’s legacy is still being formed, but his three-page budget requesting $800B+ scratched out on legal pad, should be noted by financial historians.