Kass: The Next Black Swan
NEW YORK (Real Money) --
"If the 1973 embargo experience repeats itself, the price of a barrel of oil could soar to $440 a barrel."
-- Tehran Times, "Oil Prices Could Soar to $440 a Barrel if Strait of Hormuz Closed"
If the Tehran Times is correct, a quantum rise in the price of crude oil could be the next black swan event.For now, let's characterize the Tehran Times column as extremely hyperbolic and, perhaps, bordering on the delusional. Regardless, there is much debate today as to the precise price level of crude that will dent economic growth. With crude oil at around $107 a barrel on Friday, many say that the economic tipping point is $120 to $135 a barrel. From my perch, the tipping point to economic growth could occur sooner than later and with oil prices that are not much higher than today's prices. As we all recognize, despite the improvement in the jobs market, the consumer remains in a delicate state. Unemployment is elevated vis-à-vis past recoveries, and, despite zero-interest-rate policy, quantitative easing, fiscal stimulus (100% capital-spending tax credits which expired at year-end 2011) and the recent warm weather, economic momentum is lacking, as real GDP growth has barely averaged +1.5% in each of the last five quarters. (Goldman Sachs twice reduced its first-quarter 2012 GDP forecast on Thursday and is now estimating under 2% growth). As we move toward the second half of 2012, the economic outlook is shrouded further under the uncertainty of the presidential election (and subsequent policy), the pall of a $500 billion fiscal drag into early 2013 from expiring tax cuts and a contraction in government spending. Given these conditions, I would not be surprised to see the steady improvement in the jobs market to be reversed, which would be another headwind to the consumer's recovery. Then there is the economic slowdown in Europe and possibly in China and India. On Sunday afternoon, I conducted an informal survey in West Palm Beach, Fla. I drove down Okeechobee Boulevard, and there wasn't a single gas station that was selling 87-octane unleaded gasoline for under $3.80 a gallon. (Where I reside, on the la-la island of Palm Beach, the price is approaching $5.00 a gallon.) As/if we move toward $4.00-plus a gallon (nationwide), it is hard for me to believe that consumer spending won't be impacted. In fact, this might already have occurred, as both of ISI's retail surveys (broadline and specialty) showed a large drop in the week that just ended.
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