In Europe, when oil goes down we hear immediately about how European Central Bank Chief Mario Draghi will have to add stimulus to get the inflation rate higher.
It does not matter one whit that oil going lower is pure gold for the continent. There's no oil in Europe to speak of, so every euro of oil decline is stimulus per se. No matter. As soon as oil crossed $30 the reaction in Europe is that Draghi will do great things. It's all positive for Europe -- 100%.
But in the U.S.?
Oil's decline has gone from pretty darned positive for equities to not-so-hot for equities to being a major part of the bear market in equities, with each dollar causing another dip down in our averages.
We have been in a vise grip of the oil decline here, one that I think is the Fed's own doing because it has refused to take into account any of the positives of a sharp plunge in oil for our inflation rate. Draghi signals immediately that a decline is causing too much deflation. Fed Chief Janet Yellen stays silent.
She's silent because our Fed has gone from data dependence into lockstep-rate- increase mode as employment seems to be the only input that's cogent. It doesn't even matter that there is no wage growth as of the last employment report. It doesn't even matter that consumer spending has been disappointing for months now. It's just about employment. Inflation's not in the equation.
What's odd here, though, is that the equities decline on Friday, I believe, would not have been severe if the Fed's Bill Dudley not spoken. Sure, we had a couple of weaker earnings reports last week. Wells Fargo (WFC) wasn't as good as JP Morgan (JPM). Intel's (INTC) number didn't provide any solace for personal computer companies or technology in general.
But it was Dudley's hawkish comments that really struck heart in the remaining bulls because Dudley's speech indicates that the Fed's still using the employment gauge and not taking into account much at all of oil's impact on inflation or the current weakness in the economy. It was tone deaf and as out of synch was James Bullard's positive comments were back in the August downdraft.
What's incredible is that just the day before Dudley's speech, Bullard, who had been such a hawk, moderated his view because of the oil decline. Bullard did two amazing things in his talk. First, he recognized that the consumer had stopped spending aggressively midyear. That's something that all of the retail numbers have shown, whether it be Macy's (M) and Wal-Mart (WNT) or CarMax (KMX) and AutoNation (AN).
Second, he put the inflation input right back into the equation by suggesting that we have begun to see the positive impact of oil going lower on the inflation rate, even as economic activity has yet to pick up despite the decline. Bullard's saying the lower and longer oil stays down the less need we might have for more aggressive tightening. He calculates that as oil heads toward $20, something that now seems ineluctable, the inflation rate for 2016 could go from 2% to 0.6%.
That speech, plus the good JP Morgan numbers and a rally in China gave us the midweek relief rally.
In fact, if you marry that speech with the further decline in oil after the end of sanctions to Iran, you have a recipe for a Fed that is just plain on hold.
That's right. Had Dudley not spoken and more attention had been paid to Bullard's talk one could argue that excluding the damage being done to a couple of very big oil and gas companies -- notably Freeport (FCX) and Chesapeake (CHK) -- one could argue that we would have rallied Friday.
Now, it is true that there are many other issues in the U.S. right now that are causing downward pressure on stocks.
I think, for example, we have seen the peak in auto sales, retail sales, housing sales and cellphone sales. That's a lot of peaks, enough to send any averages, let alone ones that are trading at an elevated 17x earnings, lower (maybe much lower, as if the 20% decline from the highs for most stocks hasn't already signified some heavy damage).
Also, we have an election where the Republicans blast the economy every day, but offer little in the way of solace or stimulus and the Democrats seem determined to show that they will be even tougher on the wealthy than President Obama.
But if you are worried about the Fed's lockstep plan or the unwinding of its balance sheet, you should begin to cheer lower oil if only Janet Yellen were to speak and endorse Bullard's new view instead of the pre-December rate hike thesis of Stanley Fischer and Bill Dudley, who seem stuck just on the employment input.
That's deadly for stocks, as we could tell Friday.
A combination of lower oil prices because of the obvious Iran-related supply, not weakening demand like the rest of the commodity complex, and a few weaker employment reports might cause the dynamic to shift to a more positive view for equities.
But right now we have the worst of both worlds: unremitting stress in oil-related credit and no relief from the Fed's lockstep view.
No wonder we keep going down until either Yellen blinks or oil finds a level from which it no longer retreats.
At this moment we should be embracing European equities, courtesy of Draghi's further stimulus and increased business for Europe as Iran, with its 77 million people, comes back on line.
The true mystery here is why European stocks aren't soaring. They should be huge winners in this narrative.
We, on the other hand, remain the losers, without anything in sight other than oversold bounces and a shift toward the weightings of consumer product stocks, drug stocks and utilities with only the latter currently in sight.
The deeper the slowdown in the U.S., the more you will begin to see the outperformance of stocks like Colgate (CL) and Coca-Cola (KO), which already seem to have put in bottoms worth observing if not already taking action on. After a weekend of reading the charts, they have become the ones to watch to signal a change to the new winners in a very ugly stock world.