Hard to believe that it’s been almost a year since the oil market started coming undone. And it’s only two weeks since the last set of so-called expert predictions that oil prices could collapse farther — maybe as low as $20 a barrel. But then again, at the time of those predictions the stock market was unraveling at the speed of light, diving and then skyrocketing like the most overbuilt roller coaster ever. Naturally, some of the so-called experts reminded us that they had predicted this all along. Others pointed accusatory fingers at China’s economic issues; someone should have foreseen that economy’s rather obvious slowdown, they said, and now the consequences could impact everybody.
And then, of course, a wall of the self-interested used their bully pulpits to shout: These ominous events are proof positive, they claimed, that if the Federal Reserve raises interest rates in September, the negative impact on our economy could be huge.
All of this would be quite humorous if the net effect hadn’t been to seriously dent new car sales at many dealerships for nearly a week in late August. But oil came back over $50 a barrel for West Texas Intermediate, (and promptly fell again) and the stock market improved dramatically; (and promptly fell again) and we won’t know for a few days on what the Fed will do about the cost of our money supply.
What we do know is that the experts all claim that the naysayers were overly negative, and it’ll all be sunshine, lollipops and rainbows from now on.
Imbalance ≠ Balance
That forecast is fine, at least for those of us in major urban areas in Texas, even though the only logic backing it up is how incredibly well we did back in 2009 and 2010, when the rest of the nation was suffering through the Great Depression II. Yet to say that many things are still out of balance is also fair. After all, the last two weeks’ happy talk does not change the fact that West Texas Intermediate (WTI) oil is still selling for barely over half what it sold for a year ago. Likewise, the stock market’s major gains a week ago make welcome news for those who are invested; but they don’t change the fact that today, the Dow is around 1,800 points lower than it was six weeks ago. And keep in mind, all of this is being fueled by borrowed money being put into the system worldwide during a period when it was largely negative to inflation.
The value of money has typically been set to align with inflation. At least, that’s the theory — to keep the effect of borrowed money neutral and therefore be able to deliver just enough money into the system to slowly build the economy. The theory is that if the price of money stays too far below the level of inflation, that could super-heat one’s economy. The reverse is also true: If you price money too high relative to inflation, it can stop an economy — therefore the inflationary part of it — dead in its tracks. Think Paul Volcker’s action at the Fed in 1980.
But today, as anyone who has saved any money at all knows, the old adage about the magic of compound interest no longer rings true. Worse, in spite of the trillions of dollars thrown into the world’s financial system and therefore the economy, we still have imbalances that are both inflationary and deflationary, happening at the exact same time.
First, we’ll state the obvious. The price of oil is half what it was just a year ago, while a gallon of gasoline is more than $1 cheaper. That commodity’s pricing will fall into the deflationary side of things. [On a side note, the crack spread — or the profit that refineries earn on the products they make — has gone through the roof; if it hadn’t, gasoline prices would be falling in lock step with the price of oil.]
Making things even more interesting is that two weeks ago, according to the Oil Price Information Service, the bid value of gasoline on our Gulf is right at $1.10 a gallon. But the spot price of reformulated gas, which we use here in the Metroplex, was less than $1.17 per gallon a week ago.
Looking at real estate, in the hot retirement community of Sedona, Ariz., one can find 41 Canyon Drive for sale at the same price that it sold for in 2004. But even that is misleading: The average home price in Sedona peaked in 2006 at $541,000 and today sits at just $425,000. The same holds true for Redding, Calif., which is 61 miles due south of Mount Shasta; the average priced home there is selling for just $221,000, down from $306,000 just a few years ago.
In fact, who would ever have thought that one could buy a larger, newer and nicer home for less money in large parts of California than you can on the west side of Fort Worth? It’s true. The fact is that although the dirt cheap price of money has reinflated the value of homes in Redding by 29 percent in the past six years, it’s still nowhere near what those homes once easily brought. Conversely, the San Francisco Chronicle ran a story last week bragging that, once again, people are being forced to bid tens to hundreds of thousands of dollars more than the asking price if they want to end up winning homes for sale.
Of course, the same holds true for automobiles, at least most of them on the market today. I’ve kept a database of every script for every ad that’s run on my radio show since 1997. And in December of 2001, we ran a lease ad for a Honda Accord LX sedan for only $239 a month, 36 months and with only the first payment due at delivery. Last month you could lease the exact same car for only $249: That’s 14 years, and only $10 more per month.
Compare that to the price of an Oldsmobile 98, which went from $6,800 in 1975 to upwards of $20,000 in 1989. While the prices of many trucks have gone up in the past year because the rebates needed to sell them have gone down, often one can find the Ram Crew Cab Lonestar Editions for only $3,000 more than a Silverado Extended Cab sold for in 1994.
And the biggest kicker? The Lexus GS. I actually priced a lease on one a few years ago and it was around $800 a month; but earlier this year, in a very special factory sale, one could lease that $54,000 Lexus GS for only $389 a month for 36 months and pay only $1,795 total out of pocket at delivery.
True, the prices of full-sized SUVs have gone up substantially; but for most cars and many trucks, the net cost of buying one today is close to what it was 15 years ago, while leasing those same vehicles may be the cheapest it’s ever been.
Therein lies the real warning: Many homes are still underwater outside of major cities, prices of cars almost flat when one includes today’s cheap financing, and large rebates, while prices are down for virtually all leases, and prices of all major commodities markedly down. If you had asked any legitimate economist 10 years ago what the net effect of unlimited money with negative net cost would have done to the economy by now, this is not the outcome anyone would have suggested.
That is, unless you are trying to buy a home in San Francisco.
© Ed Wallace 2015
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Association. He hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: firstname.lastname@example.org, and read all of Ed’s work at www.insideautomotive.com