Asset Allocation In The Era Of Cheap Oil (by Charles Gave, GaveKal Capital) - I've read plenty of bullish statements recently saying that the decline in oil...
Asset Allocation In The Era Of Cheap Oil (by Charles Gave, GaveKal Capital) - I've read plenty of bullish statements recently saying that the decline in oil prices amounts to a massive tax cut; a phenomenon that's making everybody better off, as US Federal Reserve vice chairman Stanley Fischer declared last week. But as Frederic Bastiat wrote, in economics you have what you see and what you don't see, or as Milton Friedman put it: There is no such thing as a free lunch. Let us assume that the world is consuming 92mn barrels of oil a day and carries 100 days of inventory. At US$100/bbl, the value of the capital tied up in inventories would be US$92mn x US$100 x 100, or US$920bn. If the price of oil falls to US$50, financing those inventories will cost US$460bn instead of US$920bn, which means that the slump in the oil price would be equivalent to the release of US$460bn of liquidity into the system...cont'd: (VIEW LINK)
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