NEW YORK ( Real Money) -- Does the cavalry get here in time? The cavalry that is the growth engine of lower crude prices? Or does the destruction in credit set us back so far that the gains from a lower key ingredient cost and the stimulus that it can provide can't bring us back up to where we were or take us even higher?
On Wednesday, the market decided that the cavalry doesn't get to the market in time and the pilgrims will now be slaughtered.
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I can't be that glibly negative. There are forces at work right now in the only thing that matters, the price of oill, which remind me a lot of the phoniness of both the move in crude to $140 per barrel in June of 2008 and then the plummet back to $60 in November. Both moves seemed false to me at the time because they were too severe, too extreme, too financially driven.
Still, the velocity and size of those moves freaked everyone out as they would today if oil were to stabilize at $60 for the morning and then an afternoon seller in thin trading were to take it down to $55. Oil in real life doesn't trade like that. Only busted hedge funds do.
That's right: I think if, say, we have a 10% drop below where the Saudis said oil would go just two weeks ago, it will be the financial guys who are puking up oil because they keep trying to call the bottom. I think there is fundamental demand nearby, but the problem is that the oil just keeps spewing. The tap won't close even as the hedge funds think it will at every level they make a stand.
I think a lot of the misunderstanding is similar to the misunderstanding the market had about the oil and gas renaissance. The financial buyers seem oblivious to the fact that there is so much successful drilling going on and that it isn't stopping any time soon. They don't understand the remarkable job many of our companies do in finding oil and exploiting oil -- regardless of the price. In fact, some of these stretched oil companies have to pump even more than they thought right now, because they need the cash flow so badly and it's a total prisoner's dilemma: they want someone, anyone, to cut back -- but it darned well isn't going to be them.
The most troubled companies have the least wherewithal to cut back.
That's precisely why everyone looks to Saudi Arabia. It's the only place that can cut back and stabilize the market. Everyone else is going full bore. Otherwise, you aren't going to see a reduction in supply any time soon.
Frankly, it's inconceivable that we will see cutbacks until probably at least this time next year, given that many oil producers have to sell futures just to bring in cash to pay the bills. It's a hook or by crook situation.
That's why, ex-Saudi Arabia, it's up to the demand cavalry to balance the supply, not supply cutbacks to balance demand. And when I see numbers like the Japanese machine tool orders -- which were down huge Wednesday night, minus 6.4%, when people were looking for something along the lines of 2% and change -- I say: Nope, no cavalry there. Nothing at all. Japan does seem helpless and hopeless. Increasingly, no pulse despite all of the hoopla.
I don't know what China has up its sleeve right now, although lower gasoline prices surely will spur more internal consumption. That's not what the world needs, though, and the plays -- Yum! Brands' (YUM) KFC or Vipshop Holdings (VIPS) or the now sinking Alibaba (BABA) , aren't helpful to the broader, global economy. That's not going to mean good orders for Caterpillar (CAT) or General Electric (GE) or United Technologies (UTX) .
Europe's the real battleground. You would think that lower oil prices could really help business there, but Germany seems to be an immovable object with its resistance to European Central Bank President Mario Draghi's attempts to get things moving and oil can't jumpstart an economy only; it can just make jumpstarting an economy easier.
The emerging markets, after all of these years, are still huge capital users and the same naïve people keep sending money to the same endlessly cheery mutual funds that support their growth until panic ensues. The panic's always faster than the cavalry.
Which leaves the U.S., which is now in the grips of "OK, who is going to go belly-up?" guessing game, instead of the "Wow, this is the greatest stimulus ever" plan.
On Feb. 17, 2009, in the midst of the greatest recession since the Depression, our nation passed a $787 billion stimulus package that was thought by the president and his allies to be enough to turn around the oh-so-sick economy. I think it's very hard to see what that stimulus accomplished, other than to help some states and local municipalities pay some bills. The impact from the so-called "shovel-ready" projects was almost nil because the shovels weren't ready and the people weren't either.
This stimulus, however, is immediate. It is one for one. It costs the federal government nothing. In fact, the government could put through a small tax right now to fix infrastructure and with gasoline falling so fast we wouldn't even know it. This is precisely the kind of stimulus that does work.
I say, give it some time. Accept that the weakness is in the funding portion of the oil supply side, mostly from outflows from the same hot money chasers who always seem to wreck things, and stay balanced, recognizing that we now swoon short-term on something we will be buoyed by in a month or two.
This is the real stimulus, one that works the way The Recovery Act was supposed to. The cavalry does come. It's just a little slower than you want it to be. Get ready to feel some arrows, but this isn't Little Big Horn. It's just some time spent in a potentially painful prairie before we get to a better place.
Editor's Note: This article was originally published at 6:19 a.m. EST on Real Money on Dec. 11.