USA Gets A New Credit Card and Oil Leaps

The long awaited debut ceiling relief rally delivered strongly in Friday trading. And there could be more to come over coming days?

The problem with that idea, is that markets appear to be rather quickly figuring out that this is just a mother shiny credit card for the US to plummet further into historic debt territory. It was only in the 1980s that US debt was nearer 30% of GDP. Compared to the now 130% and fast rising level.

If ever there was a case of the water slowly boiling, without the US frog jumping out, then this is it. Hence my cautionary note that this stock market relief rally could very well end in a crash, remains appropriate.

What its leaping on the day, is the price of oil. Up strongly in early trading after OPEC+ announced further production cuts over the weekend.

Driven by Saudi Arabia stepping up and reducing its production by 1 million barrels per day. Some other members also maintained previous voluntary reductions. Of particular note, was that the Saudi Oil Minister, Prince Abdulaziz bin Salman, stated very clearly that they would continue do 'whatever is necessary to maintain price stability’.

They are saying they are determined to keep the price of oil where it is now, or even higher. There are genuine concerns among some OPEC members that the slowing global economy will reduce demand significantly. The organisation, and particularly Saudi Arabia, appears determined to staying ahead of the supply curve. Rather than responding to it.

With China’s post Covid-lockdown boom now behind it, and the US facing persistent recession risk, it is unlikely OPEC will change track in the months ahead. Creating a significant boost to prices, just as the USA is wanting to rebuild its strategic oil reserves. Something we have been warning would be the case for the past year now, and not just in the US either. A global nationalistic reserves building war is a very real risk.

The outlook for the oil price is therefore decidedly bullish and this too will weigh on the US economy. The US inflation wild-cat continues to roam the streets untethered by previous rate hikes. Expect the Federal Reserve tightening bias to be maintained for perhaps a further full 12 months from here.

This means the only thing that will stop further rate hikes, would be a full blown banking crisis. 

Recession with banking crisis and persistent high inflation, could be the US situation over the next 12 months. Limiting the ability of the Federal Reserve to respond to slowing economy. This is a matrix the US will find difficult to escape.

In such an environment, P/E ratios could be expected to fall to 15% to 20% below historic averages. Should this worst case scenario, which appears alarmingly probable indeed unfold, then it may not matter at all that there does remains excess liquidity in the system to support stocks. It simply will not be deployed toward risk asserts at all.

For the moment, the debt ceiling relief rally is in full swing, but for how long?

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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