Oil Down, Good

There has been a big fuss made over lower oil prices and they are cratering:

So the logic goes: lower oil prices = less global demand for oil = weaker economy.  Makes sense.  Except in the US lower oil prices = more cash available for other consumer purchases = stronger economy.  And in reality it’s spikes in oil prices, not dives, that correspond with recessions:

Maybe the market is signaling something different this time, but in the past lower prices have been good for the economy and stocks.

*Please see the important disclosures that apply to this commentary HERE.  The above charts are for illustrative purposes only and do not attempt to predict actual results of any particular investment.

Does Iran’s Hyperinflation Mean for Everyone Else?

I have no clear idea, however…

Historically, incidences of hyperinflation result in high levels of social unrest – protesting, rioting, anger, regime change, etc.  This makes total sense; if the masses can’t afford food they get mad and such conditions are ripe for mobs and rioting.

As Walter Kurtz points out, “The only question now is who will be the target of people's rage and desperation this time.”  Will it at be at the regime, the West, or another group?

I want to look at the former (the regime), mainly because the latter two don’t totally change the current dynamic.  In fact, the only two other hyperinflations this century involved Zimbabwe and North Korea.  To my knowledge neither experienced regime change (Note: I think Zimbabwe does have some joint power agreement) and the discourse regarding either country has not really changed.  Still, I should note that both economies are much smaller than Iran.

The whole reason I started on this Iran post (aside from brining attention to it) is to think about the impact of social unrest and possible regime change.  I am not sure what the conventional wisdom is on an Iranian regime change, but even though they are the most destructive actor in the world arena, I think at least in the short-term it would not be a positive geopolitical event:

1. I believe that in most cases those with power, especially in extractive governments, want to stay in power and will do what it takes to do so.  As a result, saber rattling now may turn into action if the regime feels threatened.
• The analogy may be of an angry pit bull that’s cornered and probably has only one move left.
2. Who fills the power vacuum?  See Libya and Egypt.
3. Contagion to the rest of region.  As I look at a map, Saudi Arabia would essentially be surrounded by social unrest.
4. Rising oil prices could tip the world into recession again at a time of high fragility.

Caveat: I am painting this with the broadest of brushes here and shooting from the hip. There could be some important cultural, social, religious, etc. details of which I am unaware, which could derail my hypothesis.

Still the risk is important to consider, especially since we could be at an inflection point.  “Turmoil in the middle east” is always an investment risk.  Seriously, if you find a list of market threats that doesn’t list, or that hasn’t listed that in the past 6 years, please forward it to me. 

So to conclude, while the past couple posts have drifted into world affairs, I believe that what is happening in Iran is at the very least a thought when considering asset allocation going forward, especially given the current state of affairs. 

Iran Economic Collapse

I tend to avoid watching the news and focus the bulk of my reading to aggregators or sources outside traditional media for a variety of reasons.  I am going to presume that many are not that Iran is, or could be, on the brink of an economic collapse as I haven’t really heard it discussed.

Regardless, I have seen an explosion of Iran related articles and blog posts over the past few weeks (I believe it started with The Atlantic) and here are some facts:

• Iran’s monthly inflation is roughly 70%.  This is considered hyperinflation based on a widely accepted definition (> 50% a month).
• This means prices double in 40 days.
• $1 bought you 24,600 Rials (Iran’s currency) on 09/24 in Iran’s Black Market.  On October 2^nd  39,000 Rials is what you got for $1.  The Rial is least valued currency in the world relative to USD.  The official value is 12,260 Rials for a dollar.
• Sanctions began in Summer 2010: since then the Rial has depreciated 70%+ vs. USD and the monthly inflation rate has risen to 70% from 0.70%. 

And why they are having hyperinflation:

1. Iran is heavily dependent on oil exports.  The sanctions are de facto do business with Iran (mid 20s in comparative size) or do business with the US (largest economy in the world).  Thus, production takes a hit while currency in the system stays the same or increases.  Less production + more currency = less demand and greater supply of currency = inflation.
• Simplistically, if an economy produces $100 worth of goods and has currency supply $102 then overnight only has $50 worth of goods there are now $50 less of output to soak up the currency.  As a result, the excess currency goes to purchase the remaining $50 of goods, pushing up prices.
2. As #1 happens, whoever is holding Rials wants to convert those to something with a store of value – USD.  But since the USD is essentially cut off from Iran, the supply of USDs fall rapidly as people begin converting the Rial ASAP.  This reinforces #1.

So what is happening now?

• Hoarding.  Buying goods now instead of later before the price goes up.
• Rioting.  If you can’t buy bread for your family, what else can you do?
• Withholding of goods.  Why sell today when tomorrow’s price will be higher?
• More black markets.  If you want the USD why go to central bank when a guy in alleyway will give you 3x that?
• Outlawing exchange.  Prices rising, currency collapsing, so try and prevent USD demand to prop up Rial.

So now what?  Next post I will touch on this.