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We're declaring today's weather word of the day to be "fizzard." Nope, that's not a real word...but it should be, describing a fall blizzard like the one we had today, in which leaves take the place of snow and ice while the winds howl. What a nutty weather day.
Surely you've noticed the recent nosedive that gas prices have taken. Good news for drivers, not such great news for anyone who depends upon oil prices for income. That includes Iowa farmers who have been beneficiaries of high oil and gas prices that have in turn raised the price of ethanol (and, in turn, the price of corn) -- the correlation between oil prices and corn prices has been extremely strong for at least the last five years.
It should also be noted that as world oil prices have plunged, Russia has been quite badly on the losing end of the shift. As we predicted just last week, if Russia doesn't diversify its economy away from oil production, it's going to become far more unstable politically -- and that's not what we want in a nuclear power. It's a huge danger, and one that many Americans are quite deeply unaware of.
Here at home, you could be forgiven for thinking that things are much worse than they really are...the S&P 500 Index has dropped by 40% since the start of the year. If there's ever been a time to take a deep breath, it would be right now. By historical standards, the US stock market has been overvalued by historical standards for some time -- especially if you judge by P/E ratios, which is a pretty convenient shorthand measuring tool. But not by 40%. So the decline is far disproportionate to what's really happening in the overall economy. The nation's unemployment rate about 6%, and here in Iowa, the rate is only 4.5% or so, and we've been adding jobs practically non-stop since mid-2003. In the worst-case scenario, it would be stunning if the US economy shrank by even 5% due to the current situation. The Economist forecasts continued growth even through next year.
Nobody I know has cut their driving in half, yet the price of oil has dropped by half since its high. The economy isn't even remotely close to shrinking by 40%, yet that's how far the stock markets have dropped. So what's going on? The bottom line is that oil prices and stocks alike have been operating on weird, far-out margins -- just like what would happen if Brian Dean and I were in a grocery store with just one gallon of milk anywhere to be found, he on a Cheetos bender, and me in the middle of a fiery Thai dinner. On a normal day, either one of us could put off buying that gallon of milk -- after all, we both drink a lot of it throughout the year. But in an extraordinary set of circumstances, we're both chasing that one gallon of milk with unusual fury, and it's making us act a little crazy, so we're responding irrationally with our pocketbooks, bidding for that gallon of milk like it's encased in platinum.
One of the first lessons of economics is that rational people think at the margin -- and, in the cases of both oil and stocks, the margins have been totally nutty lately. In the long run, we need to step back from the brink and make better plans for tomorrow. Moments like this one only serve to re-affirm the extraordinary value of keeping a safety net of cash in a bank account and some extra skills in the brain (just in case you need to change occupations in a hurry).
The world is full of craziness this week, as Prince Philip rambles on about overpopulation, Ben Bernanke puts the independence of the Federal Reserve at risk, and professors seriously call for professional certification for business managers. With all this craziness about, it's worth taking a moment to read why authoritarianism still isn't going to eclipse freedom, at least not if we have any backbone whatsoever.
A modest proposal for saving General Motors awaits your attention as well.
Keywords in this show: authoritarianism • Bernanke, Ben • central bank independence • economics • ethanol • Federal Reserve • freedom • gas prices • GDP • General Motors • management • margins • monarchies • oil prices • overpopulation • P/E ratios • Prince Philip • Russia • safety nets • S&P 500 Index • stocks • unemployment • weather