On Sense and Nonsense

“The shirt is five pesos, right?
Very well. And as you can’t pay for it,
that’s five pesos. And as you remain in
my debt for the five pesos, that’s five
pesos. And as I shall never have the
money from you, that’s five pesos. So
that makes five and five and five and
five. That’s twenty pesos. Agreed?
“Yes, patron, agreed.”
The peon can get the shirt no-
where else when he needs one. He
can get credit nowhere but from his
master, for whom he works and from
whom he can never get away as long
as he owes him a centavo
–B. Traven, The Carreta

It is six am in Bandung and Aditya is up mulling whether to keep the motorbike he uses for the daily commute to his business in downtown Jakarta, or to sell it and get a small car, which will give him transportation for his family when they visit relatives. It is one of a half dozen  spending decisions he will make today, most of the others being smaller.

Two hours later it is six am in Seoul. Woojin us up and at ’em, checking with his wife to get a shopping list, the first of his dozen or so spending decisions for the day.

Seven hours after that it’s Six am in San Bernardino and Liam is starting the day trying to decide whether to fix the lawn mower or hire a lawn maintenance company. By the time it’s six am in Bandung again seven billion people will have made some fifty billion buying decisions, and the dominant factor on what to buy, how much or little or whether to hold off on buying at all is social mood. If it is on the rise, they’ll think expansively. If it’s upbeat enough, they’ll even borrow to buy.

But after social mood peaks, people will look at their bank balances in a different way. They and their neighbors will gradually tighten up. This flat-to-down trajectory in global business puts pressure on businesses that have debt in their capital structure, resulting in employee layoffs. Layoffs affect social mood negatively and the rollover begins to accelerate, forcing bankruptcies and debt defaults, which ultimately pull healthy businesses into the vortex and depression results.

Trends in social mood show up in the economic data. The speculative stock market peak in 2000, and the real estate top in 2007 saw peaks in spending. The rally in the stock market since then has not had enthusiastic consumption to go along with it. The subtle message is that mood is beginning to trend down.

The recent slump in the price of oil is causing a lot of chatter on the airwaves. Talking heads are spewing theories about why oil is collapsing now. So much nonsense. The price of oil has been going down since the speculative peak in 2008:

crude oil 20 year

The primary driver is an underlying steady decline in consumption:

oil consumption recent

Oil’s trend will continue down as social mood accelerates its downtrend into a bottom between now and the end of the decade. No telling how low it will go, but ten bucks a barrel would not surprise me because not much driving or spending should be happening at a Grand Supercycle bear market bottom.

Cheers,

Rod

 

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