U.S. Economy, Negative Oil, and a Beacon of Hope

Executive Summary

  • Client Communications
  • Good News and Bad News
  • S. Economy Uncertain
  • Oil Prices Turn Negative
  • A Beacon of Hope

It is May 1st! Where did April go? For some it went quickly, settling in to work from home or finding unique ways to fight off boredom. However, for others—such as healthcare workers, grocery store clerks, new home-based educators (parents of young ones), and countless others—April may have felt like the longest month of their lives. I extend my gratitude and most sincere appreciation to each of them who are serving all of us, and hope they too are finding some relief as it seems like many states are flattening the curve.

Client Communications

I will be moving my client communications to every two weeks going forward. I believe we are out of the crisis phase and moving (ever slowly) into the recovery phase. This does not mean that we are in the clear or even close. It seems like everyone has taken a deep breath and is starting to ask, “Now what?” There is good news and bad news that I’ve briefly outlined below.

Good News and Bad News

The bad news is that closures, cancellations, and social distancing will likely continue longer than most expected and will come in waves (both health and economic waves), but medical experts are suggesting we will find our new normal with a cure for COVID-19 by the second quarter of next year.

Over the last two weeks I have attended as many roundtables outside of the financial industry as possible to get a pulse of what is really happening on the ground in the world of small- to medium-sized business. It seems that businesses are separating into a dichotomy of those failing and those succeeding. On one hand, some businesses are desperately suffering. For some, sales have gone from record highs to zero overnight. To add insult to injury, it was an unforeseen crisis with only weeks, at most, to prepare; it’s close to worse-case scenario for these businesses, and I expect a large number will fail in the next few months as we move into summer.

The good news is that, from my point of view, for every one struggling business there are four or five that are doing well. They are accessing federal funds in an efficient way with help from their local bankers (thank God for the community bankers right now!). Owners are creatively figuring out if they still have the right business model or should pivot to take advantage of the “new normal”, and they are being assisted by strong local and state non-financial resources that are helping to guide and coach them through the pandemic.

U.S. Economy Uncertain

The macro view is hazy. Medium- to large-sized businesses seem to be in a waiting pattern, circling to see what is really going to happen. Unfortunately, we may only find out in three general ways: First, in permanent layoffs, after the PPP loan funds wash through the eight-week forgiveness period. Second, in bankruptcies, as there are rumors of some retailers starting to file. This does not necessarily mean it is bad for the company, rather it hurts the investor after the debt is restructured. (This is why we always hold a large basket of diversified bonds.) Third, earnings reports after the second quarter end. This means we will have to wait until the third or fourth week of July to get a clearer picture. Now you see why this is taking longer. My guess is that May and June will disappear like April, and we will all have a better idea how to fight the wake of this pandemic and what success we had in reopening the economy by August.

Oil Prices Turn Negative

If somebody told you 15 years ago, when oil prices were rising above $150 a barrel, that oil producers would one day be paying storage companies good money to take oil off their hands, what would you have said? For that matter, what would you have said if you heard this just a month ago?

As pandemic-related lockdowns force factories to close and people to cease auto and air travel, global demand for oil has fallen by a shocking 29 million barrels a day. Oil exporters have reduced production, but not nearly to this degree; until April 20th, they were selling the excess at below-extraction prices to anybody with the storage capacity to accept it. Storage capacity filled up so rapidly that, for a brief time, producers paid those who still had room in their storage facilities (via paying people to take their crude oil contracts) up to $40 a barrel to take the oil off their hands. Other producers are leasing tankers at high costs and storing oil at sea—reportedly paying $100,000 per day for each tanker.

Of course, oil does not actually have a negative worth, and the negative price concerned only contracts for delivery of barrels in May that are traded on the futures markets. Month-out futures contracts are selling at roughly $20 a barrel which suggests that oil traders believe production will come back in line with demand.

This is obviously unchartered territory for the global economy and investment markets. Nobody seems to know what will happen except, perhaps, a tsunami of bankruptcies among oil drilling companies. The average price for a gallon of regular gasoline in the U.S. has fallen to $1.49, down a dollar from a year ago, but who today is filling up their tank? Name brand companies like Exxon and Chevron are likely to see earnings decline, but in total, the oil and gas industry only makes up about eight percent of the U.S. gross domestic product—compared with 14 percent in the 1980s. The shock value of watching energy producers paying others to take oil off their hands could cause a temporary spike in stock market volatility, but for the rest of us, it’s back to social distancing, not driving much nor flying, and watching with a bit of amazement as peak oil becomes negative oil—one more strange thing about this strange period in our lives.

A Beacon of Hope

Those who watch the U.S. economic and investment markets keep hearing a thesis that money is building up in consumer accounts and when we are through the pandemic there will be a built-up demand for many things, like travel, autos, housing, retail, and entertainment. This is great news for the economy if it is true.

Is there a way to measure this? Yes, we can use the U.S. money supply figures, specifically M1 (physical currency, demand deposits, and other bank accounts). Last Monday, I attended a call hosted by Prof. Jeremy Siegel, the acclaimed finance professor from Wharton, who shared with the group that his research shows that M1 has increased 14% in the last four weeks. This is an astronomical number. To put it into context, the last time M1 went up 14% was in the 2008-2009 Great Recession and it took one year, not 4 weeks! In other words, this shows that yes, there is a build-up of cash right now since people are staying at home and not spending money as they usually would.

In general, this is good news for the U.S. economy because consumer spending is roughly 70% of U.S. GDP. We need a happy consumer with money in order to jumpstart the economy and it looks like we may just have it.

In closing, after talking with several people—from family members, colleagues, clients, friends—everyone is experiencing this pandemic in a different way and the only way I think we can react is with an abundance of love, kindness, patience, and with some flexibility to let each person, young and old, process it the way that is best for them. We will all have good days and bad days through this but, in the end, I feel that love, kindness, and patience will prevail.

Best, and stay safe and healthy!

JJ Williams