EC The End Of The Bifurcated Economy Is Not What It Was Supposed To Be

For something that central bankers and economists were so sure wasn’t ever going to be troubling, oil seems to have become something of a communicable financial disease at the outset of 2016. If 2015 was somewhat sour and disappointing, 2016 was supposed to leave no doubt, it is, just not in the manner predicted. This morning’s headlines tell you all you need to know:

The Wall Street Journal: Global Stocks Slide on Oil Rout

Reuters Shanghai: China shares slip as oil slides, outweighing stimulus hopes

Reuters UK: Oil slump rocks markets again in historic equity rout

Bloomberg: Global Stocks on Brink of Bear Market as Oil Slides; Ruble Sinks

Bloomberg Again: Emerging Markets Roiled as Stock Selloff Surpasses Asian Crisis

It’s not so much that these media outlets are reporting what they are reporting, reality has intruded after all, but rather where were these same reporters and media channels last year? Oil prices ended 2014 in a rout, but there was no widespread angst, more so just confusion about the seeming disparity between what markets were beginning to process and what the mainstream proclaimed as inarguable (recovery). Undoubtedly, the widespread trend to discount oil and bond markets at the start of 2015 was due to deference to Federal Reserve officials; not their history, mind you, which is more tragic and error-prone, but solely their credentials.

You can find any number of representative articles, but this one filed by Reuters on January 16, 2015, is very representative of that time. Headlined, Unfazed by Market Swings, Fed Sticks to mid-2015 Hike Scenario, we are all assured of “transitory.”

Tumbling oil prices have strengthened rather than weakened the Federal Reserve’s resolve to start raising interest rates around midyear even as volatile markets and a softening U.S. inflation outlook made investors push back the timing of the “liftoff.”

Interviews with senior Fed officials and advisors suggest they remain confident the U.S. economy will be ready for a modest policy tightening in the June-September period, while any subsequent rate hikes will probably be slow and depend on how markets will behave.

While they are hard-pressed to explain why bond yields have fallen so low, their confidence in the recovery stems in part from in-house analysis that shows falling oil prices are clearly positive for the U.S. economy.